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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 September 30, 1998
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11337
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FOOTHILL INDEPENDENT BANCORP
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3815805
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
510 SOUTH GRAND AVENUE, GLENDORA, CALIFORNIA 91741
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(Address of principal executive offices) (Zip Code)
(626) 963-8551 or (909) 599-9351
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(Registrant's telephone number, including area code)
Not Applicable
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(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.
5,987,175 shares of Common Stock
as of November 5, 1998
Exhibit Index on sequentially numbered Page 16
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
September 30, December 31,
1998 1997
----------- -----------
ASSETS
Cash and due from banks $ 26,654 $ 38,800
Federal funds sold 10,400 30,550
--------- ---------
Total Cash and Cash Equivalents 37,054 69,350
--------- ---------
Interest-bearing deposits in other
financial institutions 13,358 8,309
--------- ---------
Investment Securities Held-To-Maturity
(approximate market value $12,256 in
1998 and $15,171 in 1997:
U.S. Treasury 6,996 11,385
U.S. Government Agencies 2,999 999
Municipal Agencies 2,150 2,476
Other Securities -- --
--------- ---------
Total Investment Securities
Held-to-Maturity 12,145 14,860
--------- ---------
Investment Securities Available-For-Sale 84,268 30,906
--------- ---------
Loans, net of unearned discount and
prepaid points and fees 299,647 291,809
Direct lease financing 3,823 4,749
Less reserve for possible loan and
lease losses (5,334) (5,165)
--------- ---------
Total Loans & Leases, net 298,136 291,393
--------- ---------
Bank premises and equipment 7,218 7,704
Accrued interest 2,753 2,654
Other real estate owned, net of allowance
for possible losses
of $19 in 1998 and $369 in 1997 3,200 2,906
Cash surrender value of life insurance 4,414 4,041
Prepaid expenses 2,885 1,116
Deferred income taxes 1 1,889
Other assets 667 580
--------- ---------
TOTAL ASSETS $ 466,099 $ 435,708
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand deposits $ 137,342 $ 127,476
Savings and NOW deposits 96,115 87,952
Money market deposits 76,083 64,931
Time deposits in denominations of
$100,000 or more 44,869 49,064
Other time deposits 60,677 60,723
--------- ---------
Total deposits 415,086 390,146
========= =========
Accrued employee benefits 1,732 1,664
Accrued interest and other liabilities 1,925 1,734
Long-term debt 87 123
--------- ---------
Total Liabilities 418,830 393,667
========= =========
Stockholders' Equity
Contributed capital Capital stock --
authorized 12,500,000 shares without
par value; issued and outstanding
5,985,699 shares in 1998 and 5,111,993
in 1997 35,967 22,618
Additional Paid-in Capital 659 659
Retained Earnings 10,243 19,062
Accumulated Other Comprehensive Income 400 (298)
--------- ---------
Total Stockholders' Equity 47,269 42,041
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 466,099 $ 435,708
========= =========
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
INTEREST INCOME
Interest and fees on loans $22,047 $22,445 $ 7,480 $ 7,647
Interest on investment securities
U.S. Treasury 745 688 218 307
Obligations of other U.S.
government agencies 1,209 1,192 583 371
Municipal agencies 270 286 90 94
Other securities 660 150 294 47
Interest on deposits 464 147 187 66
Interest on Federal funds sold 1,372 926 491 309
Lease financing income 186 182 58 75
------- ------- ------- -------
Total Interest Income 26,953 26,016 9,401 8,916
------- ------- ------- -------
INTEREST EXPENSE
Interest on savings & NOW deposis 1,057 980 369 337
Interest on money market deposits 2,082 1,681 750 606
Interest on time deposits in
denominations of $100,000 or more 1,952 2,253 636 710
Interest on other time deposits 2,360 2,343 780 785
Interest on borrowings 8 12 2 4
------- ------- ------- -------
Total Interest Expense 7,459 7,269 2,537 2,442
------- ------- ------- -------
Net Interest Income 19,494 18,747 6,864 6,474
PROVISION FOR LOAN AND LEASE LOSSES 575 381 200 50
------- ------- ------- -------
Net Interest Income After Provisions
for Loan and Lease Losses 18,919 18,366 6,664 6,424
------- ------- ------- -------
OTHER INCOME
Fees and service charges 3,751 3,903 1,270 1,274
Gain on sale SBA loans 1 110 1 95
Other 67 196 13 27
------- ------- ------- -------
Total other income 3,819 4,209 1,284 1,396
------- ------- ------- -------
OTHER EXPENSES
Salaries and benefits 7,850 7,795 2,794 2,697
Occupancy expenses, net of
revenue of $101 in 1998 and
$97 in 1997 1,604 1,587 542 528
Furniture and equipment expenses 1,258 1,331 425 410
Other expenses (Note 2) 6,235 6,293 1,938 2,040
------- ------- ------- -------
Total Other Expenses 16,947 17,006 5,699 5,675
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 5,791 5,569 2,249 2,145
------- ------- ------- -------
PROVISION FOR INCOME TAXES 2,131 2,100 827 823
------- ------- ------- -------
NET INCOME $ 3,660 $ 3,469 $ 1,422 $ 1,322
======= ======= ======= =======
EARNINGS PER SHARE OF COMMON STOCK
Basic $ 0.62 $ 0.60 $ 0.24 $ 0.23
======= ======= ======= =======
Diluted (Note 3) $ 0.58 $ 0.57 $ 0.23 $ 0.22
======= ======= ======= =======
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 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
10% stock dividend
distributed 6/20/97 457,167 6,058 (6,058) --
Fractional shares of
stock dividend paid
in cash (5) (5)
Exercise of stock options 67,056 416 416
Common stock issued under
employee benefit and
dividend reinvestment
plans 42,023 552 552
Comprehensive Income
Net Income 3,469
Unrealized security
holding losses
(Net of taxes $(3)) 63
Total Comprehensive
income 3,532
--------- -------- ---- -------- ----- -------
BALANCE, September 30, 1997 5,086,836 $ 22,432 $592 $ 18,013 $(320) $40,717
========= ======== ==== ======== ===== =======
BALANCE, January 1, 1998 5,111,993 22,618 659 19,062 (298) 42,041
15% stock dividend
distributed 7/7/98 779,314 12,469 (12,469) --
Fractional shares of
stock dividend paid
in cash (10) (10)
Exercise of stock options 81,140 661 -- 661
Common stock issued
under employee benefit
and dividend
reinvestment plans 13,252 219 219
Comprehensive Income
Net Income 3,660
Unrealized security
holding gains
(Net of taxes $165 ) 698
Total Comprehensive
Income 4,358
--------- -------- ---- -------- ----- -------
BALANCE, September 30, 1998 5,985,699 $ 35,967 $659 $ 10,243 $ 400 $47,269
========= ======== ==== ======== ===== =======
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
---------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1998 1997
- ------------------------------------------------ --------- ---------
Cash Flows From Operating Activities:
- -------------------------------------
Interest and fees received $ 26,695 $ 25,950
Service fees and other income received 3,383 3,947
Financing revenue received under leases 186 182
Interest paid (7,551) (7,534)
Cash paid to suppliers and employees (18,248) (14,350)
Income taxes paid (333) (1,262)
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Net Cash Provided (Used) by Operating Activities 4,132 6,933
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Cash Flows From Investing Activities:
- -------------------------------------
Proceeds from maturity of investment securities (AFS) 111,416 70,806
Purchase of investment securities (AFS) (163,991) (64,886)
Proceeds from maturity of investment securities (HTM) 5,807 11,272
Purchase of investment securities (HTM) (3,046) (25,621)
Proceeds from maturity of deposits in
other financial institutions 15,132 (4,647)
Purchase of deposits in other financial
institutions (20,181) 2,669
Net (increase) decrease in credit card and
revolving credit receivables 128 (255)
Recoveries on loans previously written off 393 306
Net (increase) decrease in loans (8,430) 6,266
Net (increase) decrease in leases 926 (2,201)
Capital expenditures (521) (1,936)
Proceeds from sale of other real estate owned 106 93
Proceeds from sale of property, plant and equipment 49 62
Purchase of other real estate owned
--------- ---------
Net Cash Provided (Used) in Investing Activities (62,212) (8,072)
--------- ---------
Cash Flows From Financing Activities:
- -------------------------------------
Net increase (decrease) in demand deposits, NOW
accounts, savings accounts, and money market deposits 29,191 22,304
Net increase (decrease) in certificates of deposit
with maturities of three months or less 7,916 6,167
Net increase (decrease) in certificates of deposit
with maturities of more than three months (12,157) (16,394)
Proceeds from exercise of stock options 661 416
Proceeds from stock issued under employee benefit
and dividend reinvestment plans 219 552
Principal payment on long term debt (36) (33)
Dividends paid (10) (5)
--------- ---------
Net Cash Provided by Financing Activities 25,784 13,007
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (32,296) 11,868
- ----------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 69,350 48,573
- ---------------------------------------------- --------- ---------
Cash and Cash Equivalents at September 30, 1998 & 1997 $ 37,054 $ 60,441
- ------------------------------------------------------ ========= =========
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
---------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
-------------------------------------------------------------------------
1998 1997
------- -------
Net Income $ 3,660 $ 3,469
- ----------
Adjustments to Reconcile Net Income to
- --------------------------------------
Net Cash Provided by Operating Activities
-----------------------------------------
Depreciation and amortization 971 967
Provision for possible credit losses 575 381
(Gain) loss on sale of equipment (13) 81
Provision for deferred taxes 1,888 (53)
Increase (decrease) in taxes payable (90) 494
(Increase) decrease in other assets (69) 1,691
(Increase) decrease in interest receivable (99) 68
Increase (decrease) in discounts and premiums 27 48
Increase (decrease) in interest payable (92) (265)
(Increase) decrease in prepaid expenses (1,769) 101
Increase (decrease) in accrued expenses and other
liabilities (420) 404
Gain on sale of other real estate owned (50) (93)
Increase in cash surrender value of live insurance (373) (250)
Gain on sale of SBA loans (1) (110)
------- -------
Total Adjustments 472 3,464
------- -------
Net Cash Provided (Used) by Operating Activities $ 4,132 $ 6,933
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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
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
SEPTEMBER 30, 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 the three and nine month
periods ended September 30, 1998 and 1997.
Nine Months Three Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
Data processing $ 703 $ 829 $ 228 $ 243
Marketing expenses 543 495 166 166
Office supplies, postage
and telephone 891 1,053 273 342
Bank Insurance 425 362 154 110
Supervisory Assessments 81 110 27 38
Professional Expenses 995 1,014 329 554
Provision for OREO Loss 391 260 48 80
Provision for Y2K Expense 250 -- 50 --
Other Expenses 1,956 2,170 663 507
------ ------ ------ ------
Total Other Expenses $6,235 $6,293 $1,938 $2,040
====== ====== ====== ======
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):
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
Income Shares Income Shares Income Shares Income Shares
------ ------ ------ ------ ------ ------ ------ ------
Net income as reported $3,660 $3,469 $1,422 $1,322
Shares outstanding at period end* 5,986 5,849 5,986 5,849
Impact of weighting shares
purchased during the period (53) (76) (3) (32)
------ ----- ------ ----- ------ ----- ------ -----
Used in Basic EPS 3,660 5,933 3,469 5,773 1,422 5,983 1,322 5,817
Dilutive effect of outstanding
stock options 401 265 400 271
------ ----- ------ ----- ------ ----- ------ -----
Used in Dilutive EPS $3,660 6,334 $3,469 6,038 $1,422 6,383 $1,322 6,088
====== ===== ====== ===== ====== ===== ====== =====
* Number of shares retroactively adjusted to reflect 15% stock dividend declared
subsequent to end of period.
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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.
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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 September 30, 1998.
The estimated fair value of the Bank's financial instruments are as follows:
September 30, 1998
----------------------------
Carrying Amount Fair Value
--------------- ----------
(dollars in thousands)
Financial Assets
Cash and cash equivalents $ 37,054 $ 37,054
Investment securities and deposits 109,771 109,882
Loans 300,231 304,728
Direct lease financing 3,823 3,670
Financial Liabilities
Deposits 415,086 413,865
Long term debt 87 52
Unrecognized Financial Instruments
Commitments to extend credit 55,616 55,616
Standby letters of credit 2,727 2,727
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's principal operating subsidiary is Foothill Independent
Bank, a California state chartered bank (the "Bank"), which accounts for
substantially all of the Company's revenues and income. Accordingly, the
following discussion focuses primarily on the operations and financial condition
of the Bank.
RESULTS OF OPERATIONS
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 $390,000, or 6.2% and $747,000 or
4.0%, respectively, in the three and nine-month periods ended September 30,
1998, as compared to the same periods of 1997. These increases were primarily
attributable to increases in the average volume of the Bank's earning assets,
which resulted in increases in interest income of $485,000 or 5.4% and $937,000
or 3.6%, respectively, in the three and nine month periods ended September 30,
1998. The increases in interest income more than offset increases in interest
expense of $95,000 or 3.9% and $190,000 or 2.6%, respectively, in those same
three and nine month periods.
A bank's net interest income is affected by a number of factors
including the relative percentages or the "mix" of (i) the Bank's assets,
between loans, on the one hand, on which the Bank is able to obtain higher rates
of interest, and investment securities, federal funds sold and funds held in
interest-bearing deposits with other financial institutions, on the other hand,
on which the Bank is able to obtain somewhat lower rates of interest; (ii)
variable and fixed rate loans in its loan portfolio, and (iii) demand and
savings deposits, on the one hand, and time deposits (in denominations over or
below $100,000), on the other. 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, particularly those in
denominations greater than $100,000 ("TCDs"), cannot be implemented until they
mature, at which time a bank can seek their renewal at lower rates of interest
or allow such deposits to terminate or "run-off" in order to reduce interest
expense.
The Bank attempts to reduce its exposure to interest rate fluctuations,
and thereby at least to maintain and, if possible, to increase its net interest
margin or spread by seeking (i) to attract and maintain a significant volume of
demand and savings deposits that are not as sensitive to interest rate
fluctuations as are TCDs and other time deposits, and (ii) to match
opportunities to "reprice" earning assets, particularly loans, in response to
changes in market rates of interest which require or cause repricing of
deposits. The Bank's management has elected to allow maturing TCDs to "run-off"
and has marketing programs in place 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 $32,804,000, or 12.4% in
nine months ended September 30, 1998 compared to the same nine months of 1997
and, at September 30, 1998 such deposits represented 75% of the Bank's total
deposits as compared to 71% at September 30, 1997. However, at the same time,
the rate of loan growth declined during the three and nine months ended
September 30, 1998, which reduced the yields that the Bank was able to realize
on its earning assets. This reduction, coupled with somewhat lower market rates
of interest, caused the Bank's net interest margin (i.e., tax-adjusted net
interest income stated as a percentage of average interest-earning assets) to
decline to 6.47% at September 30, 1998 from 6.89%
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at September 30, 1997. However, during the three months ended September 30, 1998
the Bank's net interest margin increased to 6.47% from 6.33% at June 30, 1998,
due primarily to purchases of higher yielding investment securities with
available cash and cash equivalents and to a reduction in the Bank's interest
expense that was primarily attributable to increases in the volume of
non-interest bearing demand and lower-cost savings deposits, declines in the
volume of TCDs, and the decline in market rates of interest.
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 economic and competitive conditions in the
Bank's service areas that can affect loan demand and the interest rates a bank
can charge on loans or must pay on deposits. 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 $200,000 and $575,000,
respectively, in the three and nine-month periods ended September 30, 1998
compared to provisions of $50,000 and $381,000 for the corresponding periods of
1997. Net loan charge-offs for the nine months ended September 30, 1998,
aggregated $406,000, representing fourteen hundredths of one percent (0.14%) of
average loans and leases, as compared to net loan charge-offs for the same
period in 1997 of $1,183,000, which represented forty-one hundredths of one
percent (0.41%) of average loans and leases outstanding.
OTHER INCOME. Other income declined by $112,000 or 8.0% and by $390,000
or 9.3% in the three and nine month periods ended September 30, 1998,
respectively, compared to the same periods in 1997. The declines were primarily
attributable to, (i) decreases in transaction fees and service charges collected
on deposits and other banking transactions, and (ii) one time gains made in the
first and second quarters of 1997 on sales of foreclosed properties, and gains
on sales of SBA loans, for which no corresponding sales were made in 1998.
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"). In addition, included in non-interest
expense in the second and third quarters of 1998, were charges made to establish
a reserve for expenses associated with compliance with Year 2000 ("Y2K") issues.
Non-interest expense increased by approximately $24,000, or 0.4%, in the
three-month period ended September 30, 1998 compared to the same period of 1997.
However, non-interest expense decreased by $59,000, or 0.3%, in the nine-month
period ended September 30, 1998 as compared to the same nine-month period of
1997 due primarily to reductions in data processing costs and furniture and
equipment expenses. As a result, non-interest expense represented 69.9% and
72.7%, respectively, of operating income (net interest income plus other
income), for the three and nine months ended September 30, 1998 compared to
72.1% and 74.1% for the same respective periods in 1997.
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The Company's management has decided to close the Bank's branch banking
office in Walnut, California and to transfer the accounts at that office to
other nearby branch offices of the Bank during the fourth quarter of 1998.
Although the Walnut branch had been contributing to the overall profitability of
the Bank, it had not been meeting performance and growth criteria established by
management. After analyzing available alternatives, management concluded that
the cost savings that could be realized from a closing of that branch would more
than offset the loss of its contribution to the Bank's earnings. The Company
expects some one-time increases in non-interest expense arising from the closure
of the branch, but believes that those increases will not be material to the
Company's operating results. At the same time the Bank is looking at sites,
primarily in the San Gabriel Valley, for the establishment of a new branch
banking office that will meet management's performance criteria.
INCOME TAXES. Income taxes remained relatively unchanged during the
three and nine month periods ended September 30, 1998 compared to the same
periods of 1997, primarily as a result of a decrease in the Company's overall
estimated tax rate to 36.7% at September 30, 1998 from 37.7% at September 30,
1997, which offset the effect of the increase in pre-tax income during that same
period.
FINANCIAL CONDITION AND LIQUIDITY
The Company's total assets increased by approximately $30,391,000 or
7.0% during the nine months from January 1, 1998 to September 30, 1998, while
average total assets during that same nine-month period increased by $29,688,000
which also represented a 7.0% increase.
At September 30, 1998, the Company had adequate cash resources with
approximately $40,012,000 of cash held on deposit at other financial
institutions, $96,413,000 of investment securities and $10,400,000 in federal
funds sold.
The Bank has instituted marketing programs that are designed to increase
the volume of its loan portfolio and is continuing its 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, as well as on other
time deposits, at slightly lower rates than the average market rates to
discourage renewals of those deposits, and, in that manner, reduce the volume of
those deposits at the Bank. As a result, at September 30, 1998, the volume of
demand deposits and savings deposits at the Bank was $29,181,000, or 7.5%,
higher than at December 31, 1997 and non-interest-bearing demand deposits, as a
percentage of total deposits increased to 33.1% at September 30, 1998 from 32.7%
at December 31, 1997. By contrast the volume of outstanding TCDs (time deposits
in denominations of more than $100,000) declined by $4,195,000, or 8.6%, from
the volume of such deposits that were outstanding at December 31, 1997.
CAPITAL RESOURCES. It is the policy of the Company's Board of Directors
to retain earnings to support the growth of the Bank rather that to pay cash
dividends. The Company has declared stock dividends, however, including a 15%
stock dividend in April 1998 which was paid to shareholders of record on June
15, 1998. The 15% dividend was accounted for by an approximate $12,469,000
reduction in retained earnings and a corresponding $12,469,000 increase in the
stated capital of the Company.
As a result of the increased earnings in the first nine months of 1998
and the retention of internally generated funds, the Company's total
shareholders' equity increased by approximately $5,228,000 or 12.44% to
$47,269,000 at September 30, 1998 from $42,041,000 at December 31, 1997. As a
result, the Bank's Tier 1 leverage ratio was 9.8% at September 30, 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 14.6% 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.
In October 1998, the Company's Board of Directors approved a stock
repurchase program pursuant to which the Company may purchase up to 300,000
shares of the Company's common stock in open market or private transactions.
Although it is anticipated that the repurchase program will reduce, somewhat,
the capital and capital ratios of both the Company and the Bank, the capital and
capital ratios will nevertheless remain well above regulatory requirements.
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
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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 September 30,
1998, the Company recorded a net valuation surplus for unrealized gains on such
securities aggregating approximately $400,000, due primarily to increases in the
market values of U. S. Government and municipal securities held in the Bank's
investment portfolio, which resulted from the decline in market rates of
interest that occurred at the end of September 1998.
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, ("Y2K") 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.
The Company has initiated a Y2K compliance program and is currently in the
testing phase of that program. The testing phase is scheduled to be completed by
December 31, 1998 and Y2K compliance is scheduled to be achieved by March 31,
1999. The Company is also in the process of assessing the Y2K readiness of the
Bank's major loan and deposit account customers to assess what risks the Bank
may have in that area. 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, and has established a reserve for expenses associated
with resolving these issues. 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.
------------------------------
FORWARD LOOKING INFORMATION AND
UNCERTAINTIES REGARDING FUTURE PERFORMANCE
This Report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking information, which
reflects management's current views of the Company's 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 in
order to retain existing or attract new deposits, either or both of
which could, in turn, reduce interest income and net interest margins.
POSSIBLE ADVERSE CHANGES IN ECONOMIC CONDITIONS. Adverse changes
in local economic conditions could (i) reduce loan demand which could,
in turn, reduce interest income and net interest margins; (ii) adversely
affect the financial capability of borrowers to meet their loan
obligations to the Bank which, in turn, could result in increases in
loan losses and require increases in reserves for possible loan losses,
thereby adversely affecting earnings; and (iii) lead to reductions in
real property values that, due to the Bank's reliance on real property
to secure many of its loans, could make it more difficult for the Bank
to prevent potential losses on non-performing loans through the sale of
such real properties.
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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 the Bank and reduce net interest margins,
particularly if the Bank is unable, due to competitive pressures or the
rate insensitivity of earning assets, to effectuate commensurate
increases in the rates it is able to charge for 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 the intention of the Company to take
advantage of opportunities to increase the Bank's business, either
through acquisitions of other banks or the establishment of new banking
offices. If the Bank does acquire any other banks or opens any
additional banking offices, it is likely to incur additional operating
costs that may adversely affect the Company's operating results, at
least on an interim basis until any acquired bank is integrated into the
Company's operations or the new banking office is able to achieve
profitability.
YEAR 2000. The costs of resolving the Year 2000 problems could
prove to be greater than is currently anticipated or efforts to resolve
such problems in a timely manner could prove to be unsuccessful.
Due to these and other possible uncertainties and risks, readers are cautioned
not to place undue reliance on such forward-looking statements, which speak only
as of the date of this Report.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In October 1998, the Board of Directors appointed Donna Miltenberger,
the Company's Executive Vice President, and George Sellers and Richard Gallich,
to the Board of Directors. Those appointments increased the number of directors
of the Company from six to nine.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
27. Financial Data Schedule
(B) Reports on Form 8-K: None.
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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: November 12, 1998 FOOTHILL INDEPENDENT BANCORP
By: /s/ CAROL ANN GRAF
---------------------------------
CAROL ANN GRAF
Senior Vice President
Chief Financial Officer
Assistant Secretary
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EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
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Exhibit 27. Financial Data Schedule
E-1