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, 1998
--------------
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
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FOOTHILL INDEPENDENT BANCORP
----------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3815805
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
510 SOUTH GRAND AVENUE, GLENDORA, CALIFORNIA 91741
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(626) 963-8551 or (909) 599-9351
--------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal
year, if changed, since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES XX. NO .
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
5,137,881 shares of Common Stock
as of April 24, 1998
Page 1 of 17 Pages
Exhibit Index on sequentially numbered Page 16
2
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
March 31, December 31,
1998 1997
---------------- ----------------
ASSETS Cash and due from banks $ 37,976 $ 38,800
Federal funds sold 28,500 30,550
-------- --------
Total Cash and Cash Equivalents 66,476 69,350
-------- --------
Interest-bearing deposits in other
financial institutions 9,301 8,309
-------- --------
Investment Securities Held-To-Maturity
(approximate market value $14,158 in 1998 and
$15,171 in 1997
U.S. Treasury 10,389 11,385
U.S. Government Agencies 999 999
Municipal Agencies 2,471 2,476
Other Securities 250 250
-------- --------
Total Investment Securities
Held-To-Maturity 14,109 15,110
-------- --------
Investment Securities
Available-For-Sale 46,849 30,959
-------- --------
Loans, net of unearned
discount and prepaid points and fees 291,145 291,809
Direct lease financing 4,280 4,749
Less reserve for possible loan and
lease losses (5,164) (5,165)
-------- --------
Total Loans & Leases, net 290,261 291,393
-------- --------
Bank premises and equipment 7,569 7,704
Accrued interest 2,547 2,654
Other real estate owned, net of allowance for
possible losses of $491 in 1998 and $369 in 1997 2,537 2,906
Cash surrender value of life insurance 4,116 4,041
Prepaid expenses 1,500 1,116
Deferred income taxes 1,726 1,889
Other assets 339 277
-------- --------
TOTAL ASSETS $447,330 $435,708
======== ========
LIABILITIES AND Deposits
STOCKHOLDERS' Demand deposits $128,180 $127,476
EQUITY Savings and NOW deposits 95,401 87,952
Money market deposits 69,257 64,931
Time deposits in denominations of $100,000 or
more 47,014 49,064
Other time deposits 61,136 60,723
-------- --------
Total deposits 400,988 390,146
-------- --------
Accrued employee benefits 1,597 1,664
Accrued interest and other liabilities 1,392 1,734
Long-term debt 111 123
-------- --------
Total Liabilities 404,088 393,667
-------- --------
Stockholders' Equity
Contributed capital
Capital stock - authorized 12,500,000 shares
without par value; issued and outstanding
5,128,079 shares in 1998 and 5,111,993 in
1997 22,810 22,618
Additional Paid-in Capital 659 659
Retained Earnings 20,066 19,062
Accumulated Other Comprehensive (293) (298)
Income
-------- --------
Total Stockholders' Equity 43,242 42,041
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $447,330 $435,708
======== ========
See accompanying notes to financial statements
Page 2 of 17 pages
3
\
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
INTEREST INCOME
- ---------------
Interest and fees on loans $7,164 $7,326
Interest on investment securities
U.S. Treasury 271 112
Obligations of other U.S. government
agencies 271 420
Municipal agencies 91 101
Other securities 188 46
Interest on deposits 127 40
Interest on Federal funds sold 398 279
Lease financing income 66 44
------ ------
Total Interest Income 8,576 8,368
------ ------
INTEREST EXPENSE
- ----------------
Interest on savings & NOW deposits 341 323
Interest on money market deposits 626 525
Interest on time deposits in
denominations of $100,000 or more 675 836
Interest on other time deposits 780 755
Interest on borrowings 3 4
------ ------
Total Interest Expense 2,425 2,443
------ ------
Net Interest Income 6,151 5,925
PROVISION FOR LOAN AND LEASE LOSSES 275 281
- ----------------------------------- ------ ------
Net Interest Income After Provisions
for Loan and Lease Losses 5,876 5,644
------ ------
OTHER INCOME
- ------------
Fees and service charges 1,234 1,311
Gain on sale SBA loans 13
Other 1 57
------ ------
Total other income 1,235 1,381
------ ------
OTHER EXPENSES
- --------------
Salaries and benefits 2,427 2,477
Occupancy expenses, net of revenue
of $34 in 1998 and $28 in 1997 532 531
Furniture and equipment expenses 421 473
Other expenses (Note 2) 2,160 1,744
------ ------
Total Other Expenses 5,540 5,225
------ ------
INCOME BEFORE INCOME TAXES 1,571 1,800
- -------------------------- ------ ------
PROVISION FOR INCOME TAXES 567 667
- -------------------------- ------ ------
NET INCOME $1,004 $1,133
- ---------- ====== ======
EARNINGS PER SHARE OF COMMON STOCK
- ----------------------------------
Basic $ 0.17 $ 0.20
------ ------
Diluted $ 0.16 $ 0.19
====== ======
(Note 3)
See accompanying notes to financial statements
Page 3 of 17 pages
4
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
------------------------------------------
ACCUMULATED
NUMBER OF ADDITIONAL OTHER
SHARES CAPITAL PAID-IN RETAINED COMPREHENSIVE
OUTSTANDING STOCK CAPITAL EARNINGS INCOME TOTAL
-------------------------- ------------- --------------------------- -------
BALANCE, January 1, 1997 4,520,590 $15,406 $592 $20,607 $(383) $36,222
Exercise of stock
options 16,813 100 100
Common stock issued
under employee benefit and
dividend reinvestment
plans 11,495 141 141
Comprehensive Income
Net Income 1,133
Unrealized security
holding losses
(Net of taxes $78) (94)
Total Comprehensive Income 1,039
------------ ------- ------------ ---------- ------------ ----------
BALANCE, March 31, 1997 4,548,898 $15,647 $592 $21,740 $(477) $37,502
============ ======= ============ ========== ============ ==========
BALANCE, January 1, 1998 5,111,993 22,618 659 19,062 (298) 42,041
Exercise of stock options 7,730 49 49
Common stock issued
under employee benefit and
dividend reinvestment
plans 8,356 143 143
Comprehensive Income
Net Income 1,004
Unrealized security
holding gains
(Net of taxes $3) 5
Total Comprehensive 1,009
Income
------------ ------- ------------- ----------- ------------- ---------
BALANCE, March 31, 1998 5,128,079 $22,810 $659 $20,066 $(293) 43,242
============ ======= ============= =========== ============= =========
See accompanying notes to financial statements
Page 4 of 17 pages
5
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH, 1998 AND 1997
---------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1998 1997
- ------------------------------------------------ ------- -------
Cash Flows From Operating Activities:
- -------------------------------------
Interest and fees received $ 8,626 $ 8,482
Service fees and other income received 1,160 1,305
Financing revenue received under leases 66 44
Interest paid (2,495) (2,626)
Cash paid to suppliers and employees (5,849) (4,656)
Income taxes paid 12 (291)
-------- --------
Net Cash Provided by
Operating Activities 1,520 2,258
-------- --------
Cash Flows From Investing Activities:
- -------------------------------------
Proceeds from maturity of investment securities (AFS) 24,424 32,843
Purchase of investment securities (AFS) (40,349) (36,398)
Proceeds from maturity of investment securities (HTM) 1,018 400
Purchase of investment securities (HTM) - (11,014)
Proceeds from maturity of
deposits in other financial institutions 4,348 2,174
Purchase of deposits in other financial institutions (5,340) (295)
Net (increase) decrease in credit card and
revolving credit receivables 356 32
Recoveries on loans previously written off 264 54
Net (increase) decrease in loans 19 13,086
Net (increase) decrease in leases 469 (1,445)
Capital expenditures (193) (969)
Purchase of other real estate owned (369)
-------- --------
Net Cash Provided (Used) in
Investing Activities (15,353) (863)
-------- --------
Cash Flows From Financing Activities:
- -------------------------------------
Net increase (decrease) in demand
deposits, NOW accounts,
savings accounts, and money market deposits 12,412 13,926
Net increase (decrease) in
certificates of deposit with maturities of three
months or less (984) (13,281)
Net increase (decrease) in
certificates of deposit
with maturities of more than (649) 5,859
three months
Proceeds from exercise of stock options 49 -
Proceeds from stock issued under employee benefit and
dividend reinvestment plans 143 241
Principal payment on long term debt (12) (11)
Dividends paid - (40)
-------- ---------
Net Cash Provided by
Financing Activities 10,959 6,694
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (2,874) 8,089
- ----------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 69,350 48,573
- ---------------------------------------------- -------- --------
Cash and Cash Equivalents at March 31, 1998 & 1997 $66,476 $56,662
- -------------------------------------------------- ======== ========
Page 5 of 17 pages
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH
----------------------------------------
PROVIDED BY OPERATING ACTIVITIES
--------------------------------
1998 1997
------ ------
Net Income $1,004 $1,133
- ----------
Adjustments to Reconcile Net Income to
- --------------------------------------
Net Cash Provided by Operating Activities
-----------------------------------------
Depreciation and amortization 328 342
Provision for possible credit losses 275 281
(Gain) loss on sale of equipment (13)
Provision for deferred taxes 163 -
Increase (decrease) in taxes payable 416 376
(Increase) decrease in other assets (62) 522
(Increase) decrease in interest receivable 107 254
Increase (decrease) in discounts and premiums 9 (96)
Increase (decrease) in interest payable (70) (183)
Increase (decrease) in fees and other receivables 244
(Increase) decrease in prepaid expenses (384)
Increase (decrease) in accrued expenses and
other liabilities (191) (526)
Loss (gain) on sale of other real estate owned -
(Increase) decrease in cash surrender value
of life insurance (75) (63)
(Gain) loss on sale of SBA loans (13)
------ ------
Total Adjustments 516 1,125
------ ------
Net Cash Provided (Used) by Operating Activities $1,520 $2,258
- ------------------------------------------------ ====== ======
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 of 17 pages
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
MARCH 31, 1998 AND 1997
-----------------------
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, 1997.
NOTE #2 - OTHER EXPENSES
- ------------------------
The following is a breakdown of other expenses for three month period ended
March 31, 1998 and 1997.
Three Months Ended
March 31,
-------------------
1998 1997
------ ------
Data processing $ 236 $ 232
Marketing expenses 169 165
Office supplies, postage and
telephone 307 310
Bank Insurance 151 108
Supervisory Assessments 28 43
Professional Expenses 315 365
Provision for OREO Loss 343 25
Other Expenses 611 496
------ ------
Total Other Expenses $2,160 $1,744
====== ======
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):
March 31, 1998 March 31, 1997
------------------------ -----------------------
Income Shares Income Shares
--------- -------- -------- --------
Net income as reported $1,004 $1,133
Shares outstanding at period end* 5,897 5,755
Impact of weighting shares purchased
during the period used in Basic EPS (7) (25)
------ ----- ------ -----
Used in Basic EPS 1,004 5,890 1,133 5,730
Dilutive effect of outstanding stock
options 320 190
------ ----- ------ -----
Used in Dilutive EPS $1,004 6,210 $1,133 5,920
====== ===== ====== =====
*Number of shares retroactively adjusted to reflect 15% stock dividend declared
subsequent to end of period.
Page 7 of 17 pages
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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 December 31, 1998. 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.
Page 8 of 17 pages
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Notes to Condensed Consolidated Financial Statements (Continued)
NOTE #5 - Disclosures about Fair Value of Financial Instruments (Continued)
- ---------------------------------------------------------------------------
Commitments to Extend Credit and Standby Letter of Credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the parties involved. For
fixed-rate loan commitments, fair value also considered the difference between
current levels of interest rates and committed rates.
The fair value of guarantees and letters of credit are based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with parties involved at March 31, 1998.
The estimated fair value of the Bank's financial instruments are as follows:
March 31, 1998
--------------
Carrying Amount Fair Value
---------------------------
(dollars in thousands)
----------------------
Financial Assets
Cash and cash equivalents $ 75,777 $ 75,777
Investment securities and deposits 60,958 61,007
Loans 291,793 291,994
Direct lease financing 4,280 4,306
Financial Liabilities
Deposits 400,988 401,230
Long term debt 111 111
Unrecognized Financial Instruments
Commitments to extend credit 57,877 57,877
Standby letters of credit 527 527
Page 9 of 17 pages
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Company's principal operating subsidiary is Foothill Independent
Bank, a California state chartered bank (the "Bank"), which accounts for
substantially all of the Company's revenues and income. Accordingly, the
following discussion focuses primarily on the operations and financial condition
of the Bank.
RESULTS OF OPERATIONS
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 $226,000, or 3.8%, in the
quarter ended March 31, 1998, as compared to the same period of 1997, primarily
as a result of a $208,000, or 2.5%, increase in interest income and a $18,000,
or 0.7%, decline in interest expense. The increase in interest income was
primarily due to an increase in interest earned on investment securities and
federal funds sold, which more than offset a decline in interest and fees earned
on loans and leases. The decline in interest expense was due primarily to a
reduction in the volume of time certificates of deposit ("TCDs" or "Time
Deposits") in denominations of $100,000 or more on which the Bank pays its
highest rates of interest.
A bank's net interest income is affected by a number of factors
including the relative percentages or the "mix" of (i) he Bank's assets, between
loans, on the one hand, on which the Bank is able to obtain higher yields, and
investment securities, federal funds sold and funds held in interest-bearing
deposits with other financial institutions, on the other hand, on which the Bank
realizes somewhat lower yields; (ii) variable and fixed rate loans in its loan
portfolio; and (iii) demand and savings deposits, on the one hand, and Time
Deposits, on the other hand. As a general rule, a bank with a relatively high
percentage of fixed-rate loans will experience a decline in interest income
during a period of increasing market rates of interest, because it will be
unable to "reprice" its fixed rate loans to fully offset the increase in the
rates of interest it must offer to retain maturing Time Deposits and attract new
deposits. Similarly, a bank with a high percentage of Time Deposits generally
will experience greater increases in interest expense, and therefore, a decrease
in net interest income, during a period of increasing market rates of interest
than a bank with a greater percentage of demand and savings deposits which are
less sensitive to changes in market rates of interest. By contrast, during a
period of declining market rates of interest, a bank with a higher percentage of
variable loans, as a general rule, will experience a decline in net interest
income because such loans usually contain automatic repricing provisions that
are "triggered" by declines in market rates of interest; whereas offsetting
reductions in the rates of interest paid on TCDs cannot be implemented until
they mature, at which time a bank can seek their renewal at lower rates of
interest or allow such deposits to terminate or "run-off" in order to reduce
interest expense.
The Bank attempts to reduce its exposure to interest rate fluctuations,
and thereby at least to maintain and, if possible, to increase its net interest
margin or spread by seeking (i) to attract and maintain a significant volume of
demand and savings deposits that are not as sensitive to interest rate
fluctuations as are TCD's, and (ii) to match opportunities to "reprice" earning
assets, particularly loans, in response to changes in market rates of interest
which require or cause repricing of deposits.
Page 10 of 17 pages
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The Bank's management has elected to allow maturing TCD's to "run-off" and has
instituted marketing programs designed to attract additional demand and savings
deposits. As a result of these efforts the average volume of demand and savings
(including money market) deposits increased by $28,800,000, or 11.3% in the
three months ended March 31, 1998 compared to the same period in 1997 and, at
March 31, 1998, such deposits represented 72.2% of the Bank's average volume of
total deposits as compared to 68.6% at March 31, 1997. The change in the mix of
deposits and lower rates paid on interest bearing deposits enabled the Bank to
increase its net interest margin (i.e., net interest income stated as a
percentage of interest income) for the three months ended March 31, 1998 to
71.7% from the 70.8% for the three months ended March 31, 1997.
The ability of the Bank to maintain its net interest margin is not
entirely within its control because the interest rates the Bank is able to
charge on loans and the interest rates it must offer to maintain and attract
deposits are affected by national monetary policies established and implemented
by the Federal Reserve Board and by competitive conditions in the Bank's service
areas. In addition, the effect on a bank's net interest margins of changes in
market rates of interest will depend on the types and maturities of its deposits
and earning assets. For example, a change in interest rates paid on deposits in
response to changes in market rates of interest can be implemented more quickly
in the case of savings deposits and money market accounts than with respect to
Time Deposits as to which a change in interest rates generally cannot be
implemented until such deposits mature. In addition, a change in rates of
interest paid on deposits can and often does lead consumers to move their
deposits from one type of deposit to another or to shift funds from deposits to
non-bank investments or from such investments to bank deposit accounts or
instruments, which also will affect a bank's net interest margin.
PROVISION FOR LOAN AND LEASE LOSSES. The Bank follows the practice of
maintaining a reserve for possible losses on loans and leases that occur from
time to time as an incidental part of the banking business. Write-offs of loans
(essentially reductions in the carrying values of non-performing loans due to
possible losses on their ultimate recovery) are charged against this reserve
(the "Loan Loss Reserve"), which is adjusted periodically to reflect changes in
(i) the volume of outstanding loans, and (ii) the risk of potential losses due
to a deterioration in the condition of borrowers or in the value of property
securing non-performing loans or changes in general economic conditions.
Additions to the Loan Loss Reserve are made through a charge against income
referred to as the "provision for loan and lease losses." The Bank made
provisions for potential loan and lease losses of $275,000 for the first quarter
of 1998, as compared to $281,000 for the corresponding quarter of 1997. The
decrease in the provision made in 1998 was due primarily to the assessment of
the Bank's management that the amount of the Loan Loss Reserve was adequate in
relation to the volume and condition of the Bank's outstanding loans. Net loan
charge-offs for the three months ended March 31, 1998, aggregated $276,000,
representing nine hundredths of one percent (0.09%) of average loans and leases,
as compared to net loan charge-offs for the same period in 1997 of $398,000,
which represented fourteen hundredths of one percent (0.14%) of average loans
and leases outstanding.
OTHER INCOME. Other income declined by $146,000 or 10.6% in the three
month period ended March 31, 1998, compared to the same period in 1997. The
decline was primarily attributable to (i) decreases in transaction fees and
service charges collected on deposits and other banking transactions, and (ii)
gains made in the first quarter 1997 on sales of foreclosed properties and
SBA loans, for which no corresponding sales were made in the first quarter of
1998.
Page 11 of 17 pages
12
OTHER EXPENSE. Other expense (which is also referred to as
"non-interest expense"), consists primarily of (i) salaries and other employee
expenses, (ii) occupancy and furniture and equipment expenses, and (iii) other
operating and miscellaneous expenses that include insurance premiums, marketing
expenses, data processing costs and charges that are periodically made against
income to establish reserves for possible losses on the disposition of real
properties acquired on or in lieu of foreclosure of defaulted loans (commonly
referred to as "other real estate owned" or "OREO"). Non-interest expense was
approximately $315,000, or 6.0%, higher in the three month period ended March
31, 1998, compared to the same three month period of 1997, primarily due to
additions or "provisions" made to increase the reserve for possible losses on
subsequent dispositions of and increases in the carrying costs associated with
OREO properties. Those increases were partially offset by decreases in salary
expenses and furniture and equipment expenses. As a result of the increase in
non-interest expense, such expense represented 75.0% of operating income (net
interest income plus other income), for the three months ended March 31, 1998
compared to 71.5% for the same period in 1997.
INCOME BEFORE INCOME TAXES. The $229,000 decrease in income before
income taxes was due to the combined effects of the decline in other income and
the increase in non-interest expense, which more than offset the improvement in
net interest income during the quarter ended March 31, 1998.
INCOME TAXES. Income taxes decreased by approximately $100,000 or 15.0%
during the three-month period ended March 31, 1998 compared to the same periods
of 1997, primarily as a result of the decrease in pre-tax income.
FINANCIAL CONDITION AND LIQUIDITY
The Company's total assets at March 31, 1998 were approximately
$11,622,000 or 2.7% higher than at December 31, 1997, while average total assets
during the three month period, from December 31, 1997 to March 31, 1998,
increased by a lesser amount of $5,437,000, or 1.3%.
At March 31, 1998, the Company had adequate cash resources with
approximately $47,277,000 of cash held on deposit at other financial
institutions, $60,958,000 of investment securities and $28,500,000 in Federal
funds sold.
The Bank is continuing its new marketing programs that are designed to
increase the volume of demand, savings and money market deposits, which are
either non-interest bearing or bear interest at rates which are substantially
lower than those paid on Time Deposits. At the same time, management has kept
the interest rates it offers on TCDs in denominations of $100,000 or more, as
well as on other Time Deposits, at rates that are slightly lower than average
market rates, to discourage renewals of existing and purchases of new Time
Deposits by customers and, thereby, reduce the volume of those deposits at the
Bank. As a result, at March 31, 1998, the volume of demand deposits and savings
deposits at the Bank was $12,479,000 higher than at December 31, 1997 and
non-interest-bearing demand deposits, as a percentage of total deposits remained
above 30%. By contrast the volume of Time Deposits, including TCD's in excess of
$100,000, outstanding at March 31, 1998, was $1,637,000, or 1.5%, lower than at
December 31, 1997.
CAPITAL RESOURCES. It is the policy of the Board of Directors to retain
earnings to support the growth of the Bank rather that to pay cash dividends.
Those earnings have been used to open two new banking offices during 1995 and a
third office in March of 1996. The Company is
Page 12 of 17 pages
13
evaluating opportunities to expand the Bank's market coverage and anticipates
the opening of at least one additional banking office during 1998.
On April 16, 1998, the Company declared a 15% stock dividend
distributable to shareholders of record on June 15, 1998. This 15% stock
dividend follows three years of consecutive 10% stock dividends. The 15%
dividend will be distributed on July 7, 1998 and will be accounted for by an
approximate $13,100,000 reduction in retained earnings and a corresponding
$13,100,000 increase in the stated capital of the Company.
As a result of the increased earnings in the first three months of 1998
and the retention of internally generated funds, the Company's total
shareholders' equity increased by approximately $1,201,000 or 2.9% to
$43,242,000 at March 31, 1998 from $42,041,000 at December 31, 1997. As a
result, the Bank's Tier 1 leverage ratio was 9.6% at March 31, 1998 compared to
9.5% at December 31, 1997, and as of those same respective dates, the Bank's
total risk-based capital ratios were 14.2% and 14.3%, respectively. The
risk-based capital ratio is determined by weighting the bank's assets in
accordance with certain risk factors and, the higher the risk profile of a
bank's assets, the greater is the amount of capital that is required to maintain
an adequate risk-based capital ratio, which generally is at least 8%. The Bank's
Tier 1 capital and Tier 1 risk-based capital ratios compare favorably with other
peer group banks.
Under accounting principles, that became applicable to the Company in
1994, which address the financial reporting requirements for investments in
certain equity and debt securities held by financial institutions, the Company
is required to report the unrealized gain or loss on securities that are held
for sale and certain other equity securities. Since any such gains or losses are
unrealized, and any actual gain or loss will not be determined unless and until
there is a sale or other disposition of the securities, any unrealized gain is
required to be credited to, and any unrealized losses are required to be charged
against, stockholders' equity, rather than being reflected as income or loss for
income statement purposes. At March 31, 1998, the Company recorded a valuation
reserve for unrealized losses on such securities aggregating approximately
$293,000, which related primarily to certain investments in mutual funds, which
are classified as investments in marketable equity securities, and which the
Company has held for several years and intends to continue to hold for the
foreseeable future.
YEAR 2000. The Company is currently working to resolve the potential
impact of the year 2000 on the processing of date-sensitive information by the
Company's computerized information systems. The Year 2000 problem is the result
of computer programs being written using two digits (rather that four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, it is currently believed that the costs of addressing
potential problems will not have a material adverse impact on the Company's
financial position, results of operations or liquidity in future periods.
However, if the Company is unable to resolve such processing issues in a timely
manner, it could result in a material financial risk. Accordingly, the Company
plans to devote the necessary resources to resolve all significant Year 2000
issues in a timely manner. However, even if the Company is able to resolve any
such issues with respect to its computerized information systems, there is no
assurance that customers who utilize computer information systems to effectuate
banking transactions, or the Company's vendors or financial institutions with
which the Company does business, will not encounter problems that could
adversely affect the Company's business.
Page 13 of 17 pages
14
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
- -------------------------
None.
ITEM 6, EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(A) Exhibits:
27. Financial Data Schedule
(B) Reports on Form 8-K: None.
Page 14 of 17 pages
15
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 8, 1998 FOOTHILL INDEPENDENT BANCORP
By: /s/Carol Ann Graf
----------------------------------
CAROL ANN GRAF
Senior Vice President
Chief Financial Officer
Assistant Secretary
S-1
16
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered Page
------- -------------
Exhibit 27. Financial Data Schedule 17