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 June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-11337
FOOTHILL INDEPENDENT BANCORP
----------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3815805
-------------------------------- ------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
510 SOUTH GRAND AVENUE, GLENDORA, CALIFORNIA 91741
-------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(818) 963-8551 or (909) 599-9351
(Registrants'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 the issuer's classes of
common stock, as of the latest practicable date.
4,383,392 shares of Common Stock
as of July 29, 1996
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
ASSETS JUNE 30, 1996 DECEMBER 31, 1995
Cash and due from banks $ 29,871 $ 26,278
Federal funds sold 14,690 41,750
--------- ---------
Total Cash and Cash Equivalents 44,561 68,028
--------- ---------
Interest-bearing deposits in other
financial institutions 8,994 6,433
--------- ---------
Investment Securities Held-To-Maturity
(approximate market value $13,061
in 1996 and $23,582 in 1995)
U.S. Treasury 2,387 4,958
U.S. Government Agencies 7,300 14,777
Municipal Agencies 3,139 3,506
Other Securities 250 250
--------- ---------
Total Investment Securities
Held-To-Maturity 13,076 23,491
--------- ---------
Investment Securities Available-For-Sale 40,257 18,743
--------- ---------
Loans, net of unearned discount and
prepaid points and fees 265,491 259,068
Direct lease financing 1,784 2,086
Less reserve for possible loan
and lease losses (3,804) (3,644)
--------- ---------
Total Loans & Leases, net 263,471 257,510
--------- ---------
Bank premises and equipment 7,487 7,353
Accrued interest 2,699 2,851
Other real estate owned, net of allowance
for possible losses of $786 in 1996
and $909 in 1995 3,799 3,879
Cash surrender value of life insurance 3,401 3,149
Prepaid expenses 1,175 917
Deferred income taxes 1,607 1,607
Other assets 909 1,220
--------- ---------
TOTAL ASSETS $ 391,436 $ 395,181
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand deposits $ 104,758 $ 96,478
Savings and NOW deposits 83,726 78,144
Money market deposits 54,507 48,784
Time deposits in denominations of
$100,000 or more 48,966 61,457
Other time deposits 63,906 76,251
--------- ---------
Total deposits 355,863 361,114
Accrued employee benefits 1,241 1,195
Accrued interest and other liabilities 1,324 1,622
Long-term debt 189 208
--------- ---------
Total Liabilities 358,617 364,139
--------- ---------
Stockholders' Equity
Contributed capital
Capital stock-authorized 12,500,000
shares without par value; issued and
outstanding 4,382,362 shares in 1996
and 3,936,583 in 1995 14,610 10,789
Additional Paid-in Capital 456 456
Retained Earnings 18,200 19,999
Valuation Allowance for Investments (447) (202)
--------- ---------
Total Stockholders' Equity 32,819 31,042
--------- ---------
Total Liabilities and
Stockholders' Equity $ 391,436 $ 395,181
========= =========
See accompanying notes to financial statements
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
Six Months Ended June 30, Three Months Ended June 30,
1996 1995 1996 1995
INTEREST INCOME
Interest and fees on loans $ 14,986 $ 14,297 $ 7,362 $ 7,262
Interest on investment securities
U.S. Treasury 108 290 48 115
Obligations of other U.S. government
agencies 1,075 458 629 276
Municipal agencies 216 43 110 20
Other securities 102 67 50 33
Interest on deposits 229 45 118 29
Interest on Federal funds sold 495 792 161 538
Lease financing income 60 122 29 72
-------- -------- -------- --------
Total Interest Income 17,271 16,114 8,507 8,345
-------- -------- -------- --------
INTEREST EXPENSE
Interest on savings & NOW deposits 613 617 315 307
Interest on money market deposits 791 603 397 323
Interest on time deposits in denominations
of $100,000 or more 1,719 1,455 790 853
Interest on other time deposits 1,913 1,535 898 870
Interest on borrowings 10 24 5 6
-------- -------- -------- --------
Total Interest Expense 5,046 4,234 2,405 2,359
-------- -------- -------- --------
Net Interest Income 12,225 11,880 6,102 5,986
PROVISION FOR LOAN AND LEASE LOSSES 1,025 1,500 535 870
-------- -------- -------- --------
Net Interest Income After Provisions
for Loan and Lease Losses 11,200 10,380 5,567 5,116
-------- -------- -------- --------
OTHER INCOME
Fees and service charges 2,365 2,127 1,185 1,055
Other 189 253 122 89
-------- -------- -------- --------
Total other income 2,554 2,380 1,307 1,144
-------- -------- -------- --------
OTHER EXPENSES
Salaries and benefits 5,120 4,758 2,615 2,484
Occupancy expenses, net of revenue
of $31,061 in 1996 and $30,546 in 1995 1,002 930 493 489
Furniture and equipment expenses 724 621 381 306
Other expenses (Note 2) 4,031 3,735 1,834 1,530
-------- -------- -------- --------
Total other expenses 10,877 10,044 5,323 4,809
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,877 2,716 1,551 1,451
-------- -------- -------- --------
PROVISION FOR INCOME TAXES 1,101 1,033 598 552
-------- -------- -------- --------
NET INCOME $ 1,776 $ 1,683 $ 953 $ 899
======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK $ 0.41 $ 0.39 $ 0.22 $ 0.21
(Note 3) ======== ========= ======== ========
See accompanying notes to financial statements
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
VALUATION
NUMBER OF ADDITIONAL ALLOWANCE
SHARES CAPITAL PAID-IN RETAINED FOR
OUTSTANDING STOCK CAPITAL EARNINGS INVESTMENT TOTAL
----------- -------- --------- -------- ---------- -----------
BALANCE, January 1, 1995 3,547,565 $ 7,440 $ 456 $ 19,361 $ (386) $ 26,871
10% stock dividend
distributed 5/1/95 356,433 2,940 (2,940) -
Fractional shares of stock
dividend paid in cash (3) (3)
Exercise of stock options 6,300 39 39
Common stock issued under
employee benefit and dividend
reinvestment plans 26,285 214 214
Net income for six months 1,683 1,683
Net unrealized loss on
marketable equity securities
available for sale 102 102
Change in net unrealized
loss on securities
available for sale 35 35
----------- -------- --------- -------- ---------- -----------
BALANCE, June 30, 1995 3,936,583 $ 10,633 $ 456 $ 18,101 $ (249) $ 28,941
=========== ======== ========= ======== ========== ===========
BALANCE, January 1, 1996 3,955,761 $ 10,789 $ 456 $ 19,999 $ (202) $ 31,042
10% stock dividend
distributed 4/5/96 396,840 3,572 (3,572) -
Fractional shares of stock
dividend paid in cash (3) (3)
Common stock issued under
employee benefit and
dividend reinvestment plans 29,761 249 249
Net income for the six months 1,776 1,776
Net unrealized loss on
marketable equity
securities available for sale (118) (118)
Change in net unrealized
loss on securities available
for sale (127) (127)
----------- -------- --------- -------- ---------- -----------
BALANCE, June 30, 1996 4,382,362 $ 14,610 $ 456 $ 18,200 $ (447) $ 32,819
=========== ======== ========= ======== ========== ===========
See accompanying notes to financial statements
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1996 1995
Cash Flows From Operating Activities:
Interest and fees received $ 17,375 $ 16,037
Service fees and other income received 2,279 2,130
Financing revenue received under leases 60 122
Interest paid (5,273) (4,021)
Cash paid to suppliers and employees (10,346) (12,300)
Income taxes paid (1,104) (1,292)
---------- ----------
Net Cash Provided by Operating Activities 2,991 676
---------- ----------
Cash Flows From Investing Activities:
Proceeds from maturity of investment
securities 125,581 25,961
Purchase of investment securities (136,994) (28,103)
Proceeds from maturity of deposits in
other financial institutions 791 495
Purchase of deposits in other financial
institutions (3,352) (2,376)
Net (increase) decrease in credit card and
revolving credit receivables 79 (75)
Recoveries on loans previously written off 245 326
Net (increase) decrease in loans (7,614) 900
Net (increase) decrease in leases 338 946
Capital expenditures (600) (2,009)
Proceeds from sale of property, plant
and equipment 36 128
---------- ----------
Net Cash Used in Investing Activities (21,490) (3,807)
---------- ----------
Cash Flows From Financing Activities:
Net increase (decrease) in demand deposits,
NOW accounts, savings accounts, and money
market deposits 19,644 13,825
Net increase (decrease) in certificates of
deposit with maturities of three months or less (6,510) 582
Net increase (decrease) in certificates of
deposit with maturities of more than three
months (18,328) 33,592
Proceeds from exercise of stock options - 39
Proceeds from stock issued under employee
benefit and dividend reinvestment plans 249 214
Principal payment on long term debt (19) (18)
Dividends paid (4) (355)
---------- ----------
Net Cash Provided by Financing Activities (4,968) 47,879
---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents (23,467) 44,748
Cash and Cash Equivalents at Beginning of Year 68,028 36,668
---------- ----------
Cash and Cash Equivalents at June 30, 1996 & 1995 $ 44,561 $ 81,416
========== ==========
See accompanying notes to financial statements
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
1996 1995
Net Income $ 1,776 $ 1,683
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization 532 232
Provision for possible credit losses 1,025 1,500
(Gain) loss on disposition of property,
plant & equipment (23) (105)
(Increase) decrease in taxes payable (3) (259)
(Increase) decrease in other assets 17 (2,152)
Increase (decrease) in interest receivable 164 45
(Increase) decrease in interest payable (227) 214
Increase (decrease) in fees and other
receivables (252) (145)
(Increase) decrease in accrued expenses
and other liabilities 10 (289)
Gain on sale of investments and other assets (28) (48)
---------- ----------
Total Adjustments 1,215 (1,007)
---------- ----------
Net Cash Provided by Operating Activities $ 2,991 $ 676
========== ==========
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
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
JUNE 30, 1996 AND 1995
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 the year ended
December 31, 1995. The results of operations for the three month period ended
June 30, 1996 are not necessarily indicative of the results to be expected
for the full year.
NOTE #2 - OTHER EXPENSES
The following is a breakdown of other expenses for the three and six month
periods ended June 30, 1996 and 1995.
Six Months Ended June 30, Three months Ended June 30,
1996 1995 1996 1995
Data processing $ 450 $ 403 $ 233 $ 185
Marketing expenses 371 286 154 169
Office supplies, postage
and telephone 537 520 254 285
Bank insurance & assessment 294 592 144 303
Professional expenses 452 521 237 262
Litigation Settlement Costs 495 - 42 -
Provision for OREO loss 170 560 80 (10)
Other expenses 1,262 853 690 336
------- ------- ------- -------
Total Other Expenses $ 4,031 $ 3,735 $ 1,834 $ 1,530
======= ======= ======= =======
NOTE #3 - EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
outstanding during each period. Stock options have been excluded from the
computation of earning per share, as their effect is immaterial.
The weighted average number of shares used to compute earnings per share was
4,375,891 in 1996 and 4,320,957 in 1995. The weighted average number of shares
for 1995 has been adjusted for the 10% stock dividends in 1995 and 1996.
NOTE #4 - INCOME TAXES
The Bank adopted Statement No. 109 of the Financial Accounting Standard 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 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement 107 is effective for financial
statements for fiscal years ended 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 June 30, 1996.
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 credit worthiness 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 June 30, 1996.
The estimated fair value of the Bank's financial instruments are as follows:
JUNE 30, 1996
Carrying Amount Fair Value
--------------- --------------
Financial Assets (dollars in thousands)
Cash 53,555 53,555
Investment securities 53,332 53,318
Real estate loans 24,158 24,158
Installment loans 12,538 12,670
Commercial loans 225,002 222,116
Direct lease financing 1,772 1,771
Financial Liabilities
Deposits 355,863 357,116
Long term debt 189 189
Unrecognized Financial Instruments
Commitments to extend credit 32,713 32,713
Standby letters of credit 1,695 1,695
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
General
Foothill Independent Bancorp (the "Company") is a one-bank holding
company. Its principal asset is the common stock of, and its principal
operations are conducted by, Foothill Independent Bank, a California
state chartered bank (the "Bank"). The Bank accounts for substantially
all of the Company's revenues and income.
Results of Operations
Net Interest Income. Net interest income is the principal
determinant of a bank's income. Net interest income represents the
difference or "margin" between the interest earned on interest-earning
assets, such as loans and investment securities, Federal funds sold, and
deposits held at other financial institutions and the interest paid on
interest-bearing liabilities, principally deposits. Net interest income
increased by $116,000 or 1.9% in the three months ended June 30, 1996,
and by $345,000 or 2.9% in the six months ended June 30, 1996, as
compared to the same three and six month periods ended June 30, 1995.
These increases were primarily attributable to increases in interest
earned on loans and leases, and interest earned on investment securities,
which more than offset increases in interest expense of $46,000, or 1.9%,
and $812,000, or 19.1%, respectively, in the quarter and six months ended
June 30, 1996. The increases in interest earned on loans and leases for
the three and six month periods ended June 30, 1996 compared to the same
periods of 1995 were primarily attributable to 9.2% and 9.1% increases in
the average amount of loans and leases outstanding during the quarter and
six months ended June 30, 1996 compared to the same periods of 1995,
respectively. The increases in interest earned on investment securities
for the quarter and six months ended June 30, 1996 compared to the same
periods in 1995 were due to increases in the average amount of
investments of approximately 15.9% and 32.7%, respectively, for the
quarter and six months ended June 30, 1996.
Net interest income is affected by the mix of interest-earning
assets and interest-bearing liabilities of the Bank. Generally, a bank
realizes higher earnings, or yields, on loans and leases than it does on
investment securities, Federal funds sold and funds held on deposit with
other depository institutions; and a bank pays no interest on demand
deposits and interest at lesser rates on savings and "NOW" accounts than
it does on time certificates of deposit ("Time Deposits").
During the quarter and six months ended June 30, 1996, net interest
income grew at relatively modest rates primarily because (i) the volume
of investment securities grew at a greater rate than did the volume of
higher-yielding loans and leases, and (ii) Time Deposits grew
significantly during the second half of 1995 and continuing into the
first quarter of 1996 as a result of marketing programs designed to
attract deposits and, thereby, increase the Bank's liquidity. As a
result, the Bank's net interest margin (i.e., net interest income
expressed as a percentage of interest income) declined somewhat during
the quarter and six months ended June 30, 1996, to 71.7% and 70.8%,
respectively, from 71.8% and 73.7%, respectively, in the same periods of
1995. However, during the second quarter of 1996, the Bank's management
elected to allow maturing Time Deposits to "run-off" and commenced
marketing programs designed to attract additional demand and savings
deposits. As a result, at June 30, 1996, the volume of demand and
savings (including money market) deposits had increased by $8,280,000, or
8.6%, and 11,305,000, or 8.9%, respectively, from the volume of those
deposits outstanding at December 31, 1995; while, during that same
period, Time Deposits in denominations of $100,000 or more, on which the
Bank pays interest at its highest rates, declined by $12,491,000, or
20.3%. Consequently, the Company expects the Bank's net interest margin
to improve in the third quarter of 1996.
Provision for Possible Loan Losses. The Bank maintains a reserve
for possible losses on loans or leases (the "Loan Loss Reserve" or the
"Reserve") that occur from time to time as a incidental part of the
banking business. Write-offs of loans and leases (essentially reductions
in or write-offs of the carrying values of non-performing loans due to
possible losses on their ultimate recovery) are charged against the
Reserve and the Reserve is adjusted periodically to reflect changes in
the volume of outstanding loans and leases and increases in the risk of
potential losses due to a deterioration in the condition of borrowers, in
the value of property securing non-performing loans or in local or
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 $535,000 in the second quarter of 1996, as compared to $870,000
in the corresponding quarter of 1995. For the first six months of 1996
the provision for potential loan and lease losses, inclusive of the
provision made in the second quarter, totaled $1,025,000, as compared to
$1,500,000 for the first six months of 1995. The Loan Loss Reserve was
$3,804,000, or 1.4% of total loans and leases outstanding, at June 30,
1996, as compared to $3,644,000, or 1.4% of total loans and leases
outstanding, at June 30, 1995. The decrease in the provision made in the
second quarter and first six months of 1996, was due primarily to a
slowing in the growth of the Bank's volume of outstanding loans and a
determination by 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 aggregated $864,000, or
thirty-two hundredths of one percent (0.32%) of average loans and leases
outstanding, for the six months ended June 30, 1996. This compares to
net loan charge-offs of $401,000, or sixteen hundredths of one percent
(0.16%) of average loans and leases outstanding, for the six months ended
June 30, 1995.
Other Income. Other income increased by $163,000 or 14.2% and
$174,000 or 7.3%, respectively, in the three and six months ended June
30, 1996, as compared to the same three and six months of 1995, primarily
as a result of increases in fees and service charges that were
attributable primarily to increases in the volume of deposit and other
banking transactions. For the six months ended June 30, 1996, this
increase was partially offset by (i) a $64,000 decrease in other income
from the provision of ancillary services by the Bank, and (ii) the fact
that other income in the first six months of 1995 benefited from a one-
time gain of $62,000 from a sale and leaseback of the facility at which
the Bank's data processing and service center is located.
Other Expense. Other expense, consisting primarily of (i) salaries
and other employee expenses, (ii) occupancy expenses, (iii) furniture and
equipment expenses, and (iv) insurance, assessments and other operating
and miscellaneous expenses, increased by approximately $514,000 or 10.7%
and $833,000 or 8.3% for the three and six month periods ended June 30,
1996, as compared to the same periods of 1995. Contributing to this
increase was (i) a $131,000 or 5.3% and $362,000 or 7.6% increase in
salaries and other employee benefits for the three and six month periods
ended June 30, 1996, respectively, as compared to 1995. These increases
were primarily attributable to staffing requirements for the two new
banking offices opened by the Bank in Corona, California in the third
quarter of 1995 and in Chino Hills, California in the first quarter of
1996; (ii) a $85,000 increase in marketing expenses for the first six
months of 1996 and (iii) non-recurring payments aggregating $42,000 and
$495,000 for the quarter and six month periods ended June 30, 1996,
respectively, made in settlement of certain outstanding litigation.
These increases were partially offset by a $390,000 reduction, during the
six months ended June 30, 1996, in the provision for possible losses on
real properties that had been acquired by the Bank on or in lieu of
foreclosure of defaulted loans ("Other Real Estate Owned" or "OREO"), as
compared to the amount of the provision for possible losses on OREO made
in the same period of 1995. That reduction was attributable to the
disposition by the Bank of certain of those real properties subsequent to
the second quarter of 1995 and a determination by the Bank's management
that, after giving effect to such dispositions, reserves for OREO were,
for the most part, adequate.
Financial Condition and Liquidity
Between January 1, 1996 and June 30, 1996, the Company's total
assets decreased by approximately $3,745,000 or 1.0 %, which is the
result of management's decision to reduce the Bank's volume of Time
Deposits, which had grown significantly in 1995 primarily as a result of
programs designed to attract such deposits to increase the Bank's
liquidity. The Company continues to have adequate cash resources with
approximately $38,865,000 of cash held on deposit at other financial
institutions, $53,333,000 of investment securities and $14,690,000 in
Federal funds sold at June 30, 1996.
During the latter half of 1995 and continuing into the first
quarter of 1996, the Bank conducted marketing programs designed to
attract Time Deposits in order to increase the Bank's liquidity. As a
result, the average volume of Time Deposits, including Time Deposits in
denominations of $100,000 or more ("TCD's"), which bear interest at rates
higher than any other types of deposits at the Bank, increased by
approximately $14,959,000, or 13.0%, during the six months ended December
31, 1995. TCD's often are of a short-term duration and are quite
sensitive to changes in interest rates. As a result, reliance on these
types of deposits can pose risks for banking institutions. To reduce
such risks, the Bank has made it a policy to seek such deposits primarily
from existing customers in its local market areas and not to rely on
"brokered" deposits, which tend to be more interest-sensitive and
volatile. During the first six months of 1996, the Bank initiated new
marketing programs designed to increase the volume of demand, savings and
NOW deposits, which are either non-interest bearing or bear interest at
rates which are substantially lower than those paid on Time Deposits. As
a result, at June 30, 1996, the volume of TCD's had decreased by
$24,836,000 or 18.0%, from the volume outstanding at December 31, 1995,
while demand deposits had increased by $8,280,000 and savings and NOW
deposits had increased by $11,305,000 at June 30, 1996 as compared to the
volume of those deposits outstanding at December 31, 1995. Additionally,
demand deposits, as a percentage of total deposits, increased from 26.7%
at December 31, 1995 to 29.4% at June 30, 1996.
During 1995, the Board of Directors made the decision to
discontinue the payment of cash dividends in order to retain internally
generated funds to support the growth of the Bank. In addition to the
two new offices opened during 1995, the Bank opened its eleventh office,
in Chino Hills, California on March 25, 1996. During the first quarter
of 1996, the Company declared its second 10% stock dividend in two years,
which was distributed on April 5, 1996 and for accounting purposes was
recorded as a $3,571,560 reduction in retained earnings, offset by a
corresponding $3,571,560 increase in the Company's contributed capital
(see, Condensed Consolidated Statement of Changes in Stockholders' Equity
included elsewhere in this Report). As a result of the increased
earnings and the retention of internally generated funds, the Company's
shareholders' equity increased by $1,777,000 to $32,819,000 at June 30,
1996, as compared to $31,042,000 at December 31, 1995. As a result of
these increases and a 1.0% decrease in assets, the Bank's "Tier 1 capital
ratio" (the ratio of total shareholders' equity-to-total average assets)
rose to 8.09% at June 30, 1996, as compared to 7.77% at December 31,
1995, and continued to be above the minimum bank regulatory requirements
applicable to the Bank of 6%.
Federal bank regulations also require federally insured banks to
meet a "risk-based capital ratio" of 8%. Under those regulations, a
bank's assets are weighted according to certain risk formulas; and, the
higher the risk profile of a bank's assets, the greater the amount of
capital that is required to meet the risk-based capital ratio. An asset
that poses no risk, such as a U.S. government security, is weighted at 0%
and requires no capital; whereas, a commercial loan or lease is weighted
at 100% and requires 100% of the capital requirement (i.e., 8%). Based
upon the formulas set forth in the risk-based capital regulations, the
Bank's ratio of capital to risk-based assets at June 30, 1996 was 11.52%,
which is well in excess of the minimum ratio required by these
regulations.
Under accounting principles that became applicable to the Company
in 1994 that 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 June 30, 1996, the Company recorded a valuation
reserve for unrealized losses on such securities aggregating
approximately $447,000. Of this amount, $370,000 related to certain
investments in mutual funds, which are classified as investments in
marketable equity securities, and which the Company has held for several
years and intends to continue to hold for the foreseeable future.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 14, 1996.
(b) Set forth below is the name of (i) each director elected at
the meeting and (ii) the name of each other director whose term of office
as a director continued after the meeting. Opposite the names of each of
the directors elected at the meeting are the number of votes cast for
their election and the number of votes withheld. As the election was
uncontested, there were no broker non-votes.
Directors Elected at the Annual Meeting:
Name of Number of Number of
Nominee/Director Votes "For" Votes "Withheld"
George E. Langley 2,926,714 12,107
Douglas F. Tessitor 2,923,826 14,995
Max E. Williams 2,926,807 12,014
Directors Continuing in Office. The terms of office of the
following incumbent directors extend to 1997 and, therefore, they did not
stand for re-election at the 1996 Annual Meeting: Charles G. Boone,
William V. Landecena, Richard H. Barker and O.L. Mestad.
ITEM 6, EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
27. Financial Data Schedule
(B) Reports on Form 8-K: None.
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: August 9, 1996 FOOTHILL INDEPENDENT BANCORP
By: /S/CAROL ANN GRAF
----------------------------------
CAROL ANN GRAF
First Vice President
Chief Financial Officer
Assistant Secretary
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered Page
Exhibit 27. Financial Data Schedule 16