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, 1997
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.
5,055,817 shares of Common Stock
as of August 7, 1997
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
ASSETS JUNE 30, 1997 DECEMBER 31, 1996
Cash and due from banks $ 36,044 $ 33,673
Federal funds sold 19,600 14,900
--------- ---------
Total Cash and Cash Equivalents 55,644 48,573
--------- ---------
Interest-bearing deposits in other
financial institutions 3,662 3,957
--------- ---------
Investment Securities Held-To-Maturity
(approximate market value $25,505
in 1997 and $5,588 in 1996)
U.S. Treasury 16,382 2,796
U.S. Government Agencies 6,935 -
Municipal Agencies 2,172 2,529
Other Securities 250 250
--------- ---------
Total Investment Securities
Held-To-Maturity 25,739 5,575
--------- ---------
Investment Securities Available-For-Sale 35,631 39,477
--------- ---------
Loans, net of unearned discount and
prepaid points and fees 277,006 291,766
Direct lease financing 4,581 2,864
Less reserve for possible loan
and lease losses (4,084) (4,744)
--------- ---------
Total Loans & Leases, net 277,503 289,886
--------- ---------
Bank premises and equipment 8,041 7,304
Accrued interest 2,809 2,681
Other real estate owned, net of allowance
for possible losses of $1,052 in 1997
and $1,146 in 1996 4,535 4,595
Cash surrender value of life insurance 3,783 3,596
Prepaid expenses 1,174 967
Deferred income taxes 2,018 1,954
Other assets 358 1,940
--------- ---------
TOTAL ASSETS $ 420,897 $ 410,505
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand deposits $ 120,135 $ 108,670
Savings and NOW deposits 88,386 84,781
Money market deposits 61,025 59,099
Time deposits in denominations of
$100,000 or more 48,695 58,547
Other time deposits 60,794 59,869
--------- ---------
Total deposits 379,035 370,966
Accrued employee benefits 1,484 1,417
Accrued interest and other liabilities 1,264 1,732
Long-term debt 146 168
--------- ---------
Total Liabilities 381,929 374,283
--------- ---------
Stockholders' Equity
Contributed capital
Capital stock-authorized 12,500,000
shares without par value; issued and
outstanding 5,041,160 shares in 1997
and 4,520,590 in 1996 22,080 15,406
Additional Paid-in Capital 592 592
Retained Earnings 16,691 20,607
Valuation Allowance for Investments (395) (383)
--------- ---------
Total Stockholders' Equity 38,968 36,222
--------- ---------
Total Liabilities and
Stockholders' Equity $ 420,897 $ 410,505
========= =========
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,
1997 1996 1997 1996
INTEREST INCOME
Interest and fees on loans $ 14,798 $ 14,986 $ 7,472 $ 7,362
Interest on investment securities
U.S. Treasury 381 108 269 48
Obligations of other U.S. government
agencies 821 1,075 401 629
Municipal agencies 192 216 91 110
Other securities 103 102 57 50
Interest on deposits 81 229 41 118
Interest on Federal funds sold 617 495 338 161
Lease financing income 107 60 63 29
-------- -------- -------- --------
Total Interest Income 17,100 17,271 8,732 8,507
-------- -------- -------- --------
INTEREST EXPENSE
Interest on savings & NOW deposits 643 613 320 315
Interest on money market deposits 1,075 791 550 397
Interest on time deposits in denominations
of $100,000 or more 1,543 1,719 707 790
Interest on other time deposits 1,558 1,913 803 898
Interest on borrowings 8 10 4 5
-------- -------- -------- --------
Total Interest Expense 4,827 5,046 2,384 2,405
-------- -------- -------- --------
Net Interest Income 12,273 12,225 6,348 6,102
PROVISION FOR LOAN AND LEASE LOSSES 331 1,025 50 535
-------- -------- -------- --------
Net Interest Income After Provisions
for Loan and Lease Losses 11,942 11,200 6,298 5,567
-------- -------- -------- --------
OTHER INCOME
Fees and service charges 2,629 2,365 1,358 1,185
Gain on sale SBA loans 15 - 2 -
Other 169 189 72 122
-------- -------- -------- --------
Total other income 2,813 2,554 1,432 1,307
-------- -------- -------- --------
OTHER EXPENSES
Salaries and benefits 5,098 5,120 2,621 2,615
Occupancy expenses, net of revenue
of $63 in 1997 and $59 in 1996 1,059 1,002 528 493
Furniture and equipment expenses 921 724 448 381
Other expenses (Note 2) 4,253 4,031 2,509 1,834
-------- -------- -------- --------
Total other expenses 11,331 10,877 6,106 5,323
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 3,424 2,877 1,624 1,551
-------- -------- -------- --------
PROVISION FOR INCOME TAXES 1,277 1,101 610 598
-------- -------- -------- --------
NET INCOME $ 2,147 $ 1,776 $ 1,014 $ 953
======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK $ 0.43 $ 0.37 $ 0.20 $ 0.20
(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, 1997 AND 1996
VALUATION
NUMBER OF ADDITIONAL ALLOWANCE
SHARES CAPITAL PAID-IN RETAINED FOR
OUTSTANDING STOCK CAPITAL EARNINGS INVESTMENT TOTAL
----------- -------- --------- -------- ---------- -----------
BALANCE, January 1, 1996 3,955,761 $ 10,789 $ 456 $ 19,999 $ (202) $ 31,042
10% stock dividend
distributed 4/5/96 3,571 (3,571) -
Fractional shares of stock
dividend paid in cash (4) (4)
Common stock issued under
employee benefit and dividend
reinvestment plans 29,761 249 249
Net income for 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 (126) (126)
----------- -------- --------- --------- -------- ----------
BALANCE, June 30, 1996 4,382,362 $ 14,609 $ 456 $ 18,200 $ (446) $ 32,819
=========== ======== ========= ========= ======== ==========
BALANCE, January 1, 1997 4,520,590 $ 15,406 $ 592 $ 20,607 $ (383) $ 36,222
10% stock dividend
distributed 6/20/97 457,169 6,058 (6,058) -
Fractional shares of stock
dividend paid to Bancorp (5) (5)
Exercise of stock options 30,999 194 194
Common stock issued under
employee benefit and
dividend reinvestment plans 32,402 422 422
Net income for six months 2,147 2,147
Net unrealized loss on
marketable equity
securities available-for-sale (16) (16)
Change in net unrealized
loss on securities available
for sale 4 4
----------- -------- --------- -------- ---------- ----------
BALANCE, June 30, 1997 5,041,160 $ 22,080 $ 592 $ 16,691 $ (395) $ 38,968
=========== ======== ========= ======== ========== ==========
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, 1997 AND 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1997 1996
Cash Flows From Operating Activities:
Interest and fees received $ 17,084 $ 17,375
Service fees and other income received 2,504 2,279
Financing revenue received under leases 107 60
Interest paid (5,007) (5,273)
Cash paid to suppliers and employees (12,952) (10,346)
Income taxes paid (997) (1,104)
---------- ----------
Net Cash Provided(Used) by Operating Activities 739 2,991
---------- ----------
Cash Flows From Investing Activities:
Proceeds from maturity of investment
securities 58,988 125,581
Purchase of investment securities (75,281) (136,994)
Proceeds from maturity of deposits in
other financial institutions (2,374) 791
Purchase of deposits in other financial
institutions 2,669 (3,352)
Net (increase) decrease in credit card and
revolving credit receivables (1,050) 79
Recoveries on loans previously written off 223 245
Net (increase) decrease in loans 13,667 (7,614)
Net (increase) decrease in leases (1,717) 338
Capital expenditures 1,620 (600)
Proceeds from sal of other real estate owned 987 -
Proceeds from sale of property, plant
and equipment 122 36
---------- ----------
Net Cash Provided(Used) in Investing Activities (2,146) (21,490)
---------- ----------
Cash Flows From Financing Activities:
Net increase (decrease) in demand deposits,
NOW accounts, savings accounts, and money
market deposits 16,936 19,644
Net increase (decrease) in certificates of
deposit with maturities of three months or less (10,389) (6,510)
Net increase (decrease) in certificates of
deposit with maturities of more than three
months 1,462 (18,328)
Proceeds from exercise of stock options 194 -
Proceeds from stock issued under employee
benefit and dividend reinvestment plans 422 249
Principal payment on long term debt (102) (19)
Dividends paid (45) (4)
---------- ----------
Net Cash Provided by Financing Activities 8,478 (4,968)
---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents 7,071 (23,467)
Cash and Cash Equivalents at Beginning of Year 48,573 68,028
---------- ----------
Cash and Cash Equivalents
at June 30, 1997 & 1996 $ 55,644 $ 44,561
========== ==========
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, 1997 AND 1996
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
1997 1996
Net Income $ 2,147 $ 1,776
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization (2,357) 532
Provision for possible credit losses 331 1,025
(Gain) loss on disposition of property,
plant & equipment (122) (23)
Provision for deferred taxes (64) -
(Increase) decrease in taxes payable 344 (3)
(Increase) decrease in other assets 1,582 17
Increase (decrease) in interest receivable 128 164
(Increase) decrease in discounts and premiums (37) -
(Increase) decrease in interest payable (180) (227)
Increase (decrease) in fees and other
receivables (207) (252)
(Increase) decrease in accrued expenses
and other liabilities (624) 10
Increase in cash surrender value of life
insurance (187) -
Gain on sale of investments and other assets (15) (28)
---------- ---------
Total Adjustments (1,408) 1,215
---------- ---------
Net Cash Provided(Used) by Operating Activities $ 739 $ 2,991
========== =========
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, 1997 AND 1996
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, 1996. The results of operations for the three month period ended
June 30, 1997 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, 1997 and 1996.
Six Months Ended June 30, Threee Months Ended June 30,
1997 1996 1997 1996
Data processing $ 586 $ 450 $ 354 $ 233
Marketing expenses 329 371 164 154
Office supplies, postage
and telephone 711 537 401 254
Bank Insurance 252 243 144 127
FDIC Assessments 72 51 - -
Legal Fees 460 236 95 21
Provision for OREO loss 180 170 155 80
Other expenses 1,663 1,973 1,167 948
------- ------- ------- -------
Total Other Expenses $ 4,253 $ 4,031 $ 2,480 $ 1,187
======= ======= ======= =======
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
5,001,268 in 1997 and 4,805,841 in 1996. The weighted average number of shares
has been adjusted for the 10% stock dividends in 1996 and 1997.
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, 1997.
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, 1997.
The estimated fair value of the Bank's financial instruments are as follows:
MARCH 31, 1997
Carrying Amount Fair Value
--------------- --------------
Financial Assets (dollars in thousands)
Cash 59,306 59,306
Investment securities 61,370 61,136
Real estate loans 26,815 26,616
Installment loans 6,955 6,831
Commercial loans 244,476 243,786
Direct lease financing 4,466 4,435
Financial Liabilities
Deposits 379,036 379,160
Long term debt 146 146
Unrecognized Financial Instruments
Commitments to extend credit 36,358 36,358
Standby letters of credit 527 527
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.
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 $246,000, or 4.0%, in
the three-month period ended June 30, 1997, as compared to the same
three-month period of 1996. This increase was primarily attributable to an
increase in interest income of $225,000 or 2.6% and a decrease in interest
expense of $21,000 or 0.9%. The increase in interest income was primarily
the result of a higher average of interest earning assets in the second
quarter of 1997 compared to the same quarter of 1996. The lesser increase
in net interest income of $48,000 or 0.4%, in the six month period ended
June 30, 1997 compared to the same period in 1996 was primarily due to the
decrease of $219,000 or 4.4% in interest expense which was partially offset
for a 1% decline in interest income. The decline in interest expense was due
primarily to a reduction in the volume of time certificates of deposit
("TCDs" or "Time Deposits"), both in denominations of $100,000 or more and in
denominations of less that $100,000, and, to a lesser extent, a decline in
market 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) 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, 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. Beginning in the
second half of 1996 and continuing through the first half of 1997, the Bank's
management elected to allow maturing TCD's to "run-off" and commenced
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 $28,637,000, or 12.4% in
six months ended June 30, 1997 compared to the same period in 1996 and, at June
30, 1997 such deposits represented 71% of the Bank's total deposits as compared
to 68% at June 30, 1996. The change in the mix of deposits and lower rates
paid on interest bearing deposits contributed to an improvement in the Bank's
net interest margin (i.e., net interest income stated as a percentage of
interest income) in the quarter and six months ended June 30, 1997 to 72.7% and
71.8%, respectively, from 71.7% and 70.8%, respectively, in the same quarter
and six months of 1996.
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."
During the first and second quarters of 1997, the Bank was able to dispose
of certain non-performing loans which enabled the Bank to reduce the
provision in the six months ended June 30, 1997, to $331,000, from
$1,025,000 in the same six months of 1996. Additionally, the provision in the
three months ended June 30, 1997 was $50,000 compared to $535,000 in the
same three months of 1996. Net loan charge-offs for the six months ended
June 30, 1997, aggregated $991,000, representing thirty-five hundredths of
one percent (0.35%) of average loans and leases, as compared to net loan
charge-offs for the same period in 1996 of $864,000, which represented
thirty-two hundredths of one percent (0.32%) of average loans and leases
outstanding.
Other Income. Other income increased by $125,000 or 9.6% and by $259,000 or
10.1% in the three and six month periods ended June 30, 1997, respectively,
compared to the same periods in 1996. The increases were primarily attributable
to increases in transaction fees and service charges that were the result of
increases in the volume of total deposits and other banking transactions.
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
$783,000, or 14.7% and $454,000 or 4.2% higher in the three and six month
periods ended June 30, 1997, respectively, compared to the three and six month
periods of 1996 partially due to an increase in furniture and equipment expenses
related to a bankwide data conversion that took place on April 14, 1997.
Non-interest expense represented 78.5% and 75.1%, respectively, of operating
income (net interest income plus other income), for the three and six months
ended June 30, 1997 compared to 71.8% and 73.6%, respectively, for the same
periods in 1996.
Income Taxes. Income taxes increased by approximately $12,000 or 2.0% and
$176,000 or 16.0% during the three and six month periods ended June 30, 1997
compared to the same periods of 1996, primarily as a result of the increase
in pre-tax income achieved in 1997.
FINANCIAL CONDITION AND LIQUIDITY
The Company's total assets at June 30, 1997 were approximately $10,392,000 or
2.5% higher than at December 31, 1996, while average total assets during the
six month period, from December 31, 1996 to June 30, 1997, remained relatively
unchanged, increasing by $500,000 or 0.1%.
Average loans and leases decreased approximately $13,520,000 or 4.5% in the six
months ended June 30, 1997 primarily due to the reduction the amount of non-
performing loans in the loan portfolio. The average amount of investment
securities and Federal funds sold held by the Bank during the first six
months of 1997 increased by approximately $15,345,000 or 24.9% which was
partially offset by a decrease of $848,000 or 39.1% in the average volume of
interest bearing deposits held at other financial institutions.
Beginning in the first quarter of 1996 and continuing into 1997, the Bank
initiated new marketing programs 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 began reducing the interest rates it
offered on TCDs in denominations of $100,000 or more, as well as on other Time
Deposits, 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 June 30, 1997, the volume of demand deposits and savings deposits
at the Bank was $15,070,000 higher than at December 31, 1996 and non-interest
bearing demand deposits, as a percentage of total deposits, had increased to
31.7% from 29.2% at December 31, 1996. By contrast the volume of Time
Deposits, including TCD's in excess of $100,000, outstanding at June 30, 1997,
was $9,852,000, or 17%, lower than at December 31, 1996.
Capital Resources. 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 further 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. On April 9, 1997, the Company declared its
third 10% stock dividend in three years to shareholders of record on June 6,
1997. This dividend was distributed on June 20, 1997 and was accounted for by
a $6,058,000 reduction in retained earnings and a corresponding $6,058,000
increase in stated capital of the Company.
As a result of the increased earnings in the first six months of 1997 and the
retention of internally generated funds, the Company's total shareholders'
equity increased by approximately $2,746,000 or 7.6% to $38,968,000 at
June 30, 1997 from $36,222,000 at December 31, 1996. As a result, the Bank's
Tier 1 leverage ratio increased to 9.1% at June 30, 1997 compared to 8.5% at
December 31, 1996, and as of those same respective dates, the Bank's risk-based
capital ratios were 13.8% and 12.3%, 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 June 30, 1997, the Company
recorded a valuation reserve for unrealized losses on such securities
aggregating approximately $395,000. Of this amount, $369,000 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 13, 1997.
(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 name
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 Nominee/Director Richard H. Barker
Number of Votes "For" 3,515,757
Number of Votes "Withheld" 203,745
Name of Nominee/Director Charles G. Boone
Number of Votes "For" 3,511,874
Number of Votes "Withheld" 207,628
Name of Nominee/Director William V. Landecena
Number of Votes "For" 3,512,340
Number of Votes "Witheld" 207,162
Name of Nominee/Director O.L. Mestad
Number of Votes "For" 3,509,175
Number of Votes "Withheld" 210,327
Directors Continuing in Office. The terms of office of the following
incumbent directors extend to 1998 and, therefore, they did not stand for re-
election at the 1997 Annual Meeting: George E. Langley, Douglas F. Tessitor,
and Max E. Williams.
(c) At the Annual Meeting the shareholders also approved an increase
in the number of shares issuable under the 1993 Stock Incentive
Plan from 400,000 to 900,000 by the following vote:
FOR 2,124,521
AGAINST 496,965
ABSTAIN 98,126
BROKER NON-VOTES 999,349
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.
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 11, 1997 FOOTHILL INDEPENDENT BANCORP
By:
CAROL ANN GRAF
Senior Vice President
Chief Financial Officer
Assistant Secretary
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered Page
Exhibit 27. Financial Data Schedule 17