1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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
------------------- ---------------------
Commission file number 0-11337
FOOTHILL INDEPENDENT BANCORP
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3815805
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
510 SOUTH GRAND AVENUE, GLENDORA, CALIFORNIA 91741
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(626) 963-8551 or (909) 599-9351
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal
year, if changed, since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES X 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.
5,982,310 shares of Common Stock as of August 5, 1998
Page 1 of 17 Pages
Exhibit Index on sequentially numbered Page 16
2
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
June 30, December 31,
1998 1997
---------- ------------
ASSETS
Cash and due from banks $ 29,836 $ 38,800
Federal funds sold 43,600 30,550
--------- ---------
Total Cash and Cash Equivalents 73,436 69,350
--------- ---------
Interest-bearing deposits in other financial
institutions 11,967 8,309
--------- ---------
Investment Securities Held-To-Maturity
(approximate market value $13,698 in 1998
and $15,171 in 1997
U.S. Treasury 8,393 11,385
U.S. Government Agencies 2,999 999
Municipal Agencies 2,253 2,476
Other Securities
--------- ---------
Total Investment Securities
Held-To-Maturity 13,645 14,860
--------- ---------
Investment Securities Available-For-Sale 57,295 30,906
--------- ---------
Loans, net of unearned discount and
prepaid points and fees 284,723 291,809
Direct lease financing 3,974 4,749
Less reserve for possible loan and lease
losses (5,333) (5,165)
--------- ---------
Total Loans and Leases, net 283,364 291,393
--------- ---------
Bank premises and equipment 7,356 7,704
Accrued interest 2,607 2,654
Other real estate owned, net of allowance for
possible losses of $480 in 1998 and $369
in 1997 2,750 2,906
Cash surrender value of life insurance 4,339 4,041
Prepaid expenses 1,323 1,116
Deferred income taxes 1,706 1,889
Other assets 3,749 580
--------- ---------
TOTAL ASSETS $ 463,537 $ 435,708
========= =========
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits
Demand deposits $ 137,881 $ 127,476
Savings and NOW deposits 93,372 87,952
Money market deposits 71,989 64,931
Time deposits in denominations of $100,000
or more 47,098 49,064
Other time deposits 64,443 60,723
--------- ---------
Total deposits 414,783 390,146
--------- ---------
Accrued employee benefits 1,672 1,664
Accrued interest and other liabilities 1,861 1,734
Long-term debt 99 123
--------- ---------
Total Liabilities 418,415 393,667
--------- ---------
Stockholders' Equity
Contributed capital
Capital stock - authorized 12,500,000
shares without par value; issued and
outstanding 5,200,079 shares in 1998
and 5,111,993 in 1997 35,904 22,618
Additional Paid-in Capital 659 659
Retained Earnings 8,831 19,062
Accumulated Other Comprehensive Income (272) (298)
--------- ---------
Total Stockholders' Equity 45,122 42,041
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 463,537 $ 435,708
========= =========
See accompanying notes to financial statements
Page 2 of 16
3
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
Six Months Ended Three Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
Interest Income
Interest and fees on loans $14,567 $14,798 $ 7,403 $ 7,472
Interest on investment securities
U.S. Treasury 527 381 256 269
Obligations of other U.S.
government agencies 626 821 355 401
Municipal agencies 180 192 89 91
Other securities 366 103 178 57
Interest on deposits 277 81 150 41
Interest on Federal funds sold 881 617 483 338
Lease financing income 128 107 62 63
------- ------- ------- -------
Total Interest Income 17,552 17,100 8,976 8,732
------- ------- ------- -------
Interest Expense
Interest on savings & NOW deposits 688 643 347 320
Interest on money market deposits 1,332 1,075 706 550
Interest on time deposits in
denominations of $100,000 or more 1,316 1,543 641 707
Interest on other time deposits 1,580 1,558 800 803
Interest on borrowings 6 8 3 4
------- ------- ------- -------
Total Interest Expense 4,922 4,827 2,497 2,384
------- ------- ------- -------
Net Interest Income 12,630 12,273 6,479 6,348
Provision for Loan and Lease Losses 375 331 100 50
------- ------- ------- -------
Net Interest Income After Provisions
for Loan and Lease Losses 12,255 11,942 6,379 6,298
------- ------- ------- -------
Other Income
Fees and service charges 2,481 2,629 1,247 1,318
Gain on sale SBA loans 15 2
Other 54 169 53 112
------- ------- ------- -------
Total other income 2,535 2,813 1,300 1,432
------- ------- ------- -------
Other Expenses
Salaries and benefits 5,056 5,098 2,629 2,621
Occupancy expenses, net of revenue
of $67 in 1998 and $63 in 1997 1,062 1,059 530 528
Furniture and equipment expenses 833 921 412 448
Other expenses (Note 2) 4,297 4,253 2,137 2,509
------- ------- ------- -------
Total Other Expenses 11,248 11,331 5,708 6,106
------- ------- ------- -------
Income Before Income Taxes 3,542 3,424 1,971 1,624
------- ------- ------- -------
Provision for Income Taxes 1,304 1,277 737 610
------- ------- ------- -------
Net Income $ 2,238 $ 2,147 $ 1,234 $ 1,014
======= ======= ======= =======
Earnings Per Share of Common Stock
Basic (Note 3) $ 0.38 $ 0.37 $ 0.21 $ 0.17
------- ------- ------- -------
Diluted (Note 3 $ 0.35 $ 0.35 $ 0.19 $ 0.16
======= ======= ======= =======
See accompanying notes to financial statements
Page 3 of 16
4
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED JUNE 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 6/20/97 457,169 6,058 (6,058) --
Fractional shares of stock
dividend paid in cash (5) (5)
Exercise of stock options 30,999 194 194
Common stock issued under
employee benefit and
dividend reinvestment plans 32,402 422 422
Comprehensive Income
Net Income 2,147
Unrealized security
holding losses
(Net of taxes $7) (12)
Total Comprehensive Income 2,135
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1997 $ 5,041,160 $ 22,080 $ 592 $ 16,691 $ (395) $ 38,968
=========== =========== =========== =========== =========== ===========
BALANCE, January 1, 1998 5,111,993 22,618 659 19,062 (298) 42,041
15% stock dividend to be
distributed 7/7/98 12,469 (12,469) --
Fractional shares of stock
dividend paid in cash -- --
Exercise of stock options 77,465 634 -- 634
Common stock issued under
employee benefit and
dividend reinvestment plans 10,621 183 183
Comprehensive Income
Net Income 2,238
Unrealized security
holding gains
(Net of taxes $22 ) 26
Total Comprehensive Income 2,264
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1998 5,200,079 $ 35,904 $ 659 $ 8,831 $ (272) $ 45,122
=========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements
Page 4 of 16
5
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
1998 1997
-------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash Flows From Operating Activities:
Interest and fees received $ 17,410 $ 17,084
Service fees and other income received 2,181 2,605
Financing revenue received under leases 128 107
Interest paid (4,949) (5,007)
Cash paid to suppliers and employees (11,266) (9,677)
Income taxes paid (761) (997)
-------- --------
Net Cash Provided (Used) by Operating Activities 2,743 4,115
-------- --------
Cash Flows From Investing Activities:
Proceeds from maturity of investment securities (AFS) 59,831 55,808
Purchase of investment securities (AFS) (86,166) (50,716)
Proceeds from maturity of investment securities (HTM) 4,297 3,180
Purchase of investment securities (HTM) (3,033) (23,580)
Proceeds from maturity of deposits in
other financial institutions 9,297 (2,374)
Purchase of deposits in other financial
institutions (12,955) 2,669
Net (increase) decrease in credit card and
revolving credit receivables 356 (1,050)
Recoveries on loans previously written off 335 223
Net (increase) decrease in loans 3,366 12,682
Net (increase) decrease in leases 775 (1,717)
Capital expenditures (315) (913)
Proceeds from sale of other real estate owned 94 248
Proceeds from sale of property, plant and equipment 18 18
Purchase of other real estate owned
-------- --------
Net Cash Provided (Used) in Investing Activities (24,100) (5,522)
Cash Flows From Financing Activities:
Net increase (decrease) in demand deposits, NOW accounts,
savings accounts, and money market deposits 22,896 16,936
Net increase (decrease) in certificates of deposit
with maturities of three months or less 10,280 (10,389)
Net increase (decrease) in certificates of deposit
with maturities of more than three months (8,526) 1,462
Proceeds from exercise of stock options 634 194
Proceeds from stock issued under employee benefit and
dividend reinvestment plans 183 422
Principal payment on long term debt (24) (102)
Dividends paid -- (45)
-------- --------
Net Cash Provided by Financing Activities 25,443 8,478
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 4,086 7,071
Cash and Cash Equivalents at Beginning of Year 69,350 48,573
-------- --------
Cash and Cash Equivalents at June 30, 1998 and 1997 $ 73,436 $ 55,644
======== ========
Page 5 of 16
6
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
1998 1997
-------- -------
Net Income $ 2,238 $ 2,147
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization 652 643
Provision for possible credit losses 375 331
(Gain) loss on sale of equipment (7) 72
Provision for deferred taxes 183 (66)
Increase (decrease) in taxes payable 360 344
(Increase) decrease in other assets (26) 1,582
(Increase) decrease in interest receivable 47 128
Increase (decrease) in discounts and premiums (61) (37)
Increase (decrease) in interest payable (27) (180)
Increase (decrease) in fees and other
receivables
(Increase) decrease in prepaid expenses (207) (207)
Increase (decrease) in accrued expenses and
other liabilities (430) (362)
Loss (gain) on sale of other real estate owned (49) (93)
(Increase) decrease in cash surrender value (298) (187)
of life insurance
(Gain) loss on sale of SBA loans
------- -------
Total Adjustments 505 1,968
------- -------
Net Cash Provided (Used) by Operating Activities $ 2,743 $ 4,115
======= =======
DISCLOSURE OF ACCOUNTING POLICY
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and Federal funds sold. Generally, Federal funds
are purchased and sold for one-day periods.
See accompanying notes to financial statements
Page 6 of 16 pages
7
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
JUNE 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 six
month periods ended June 30, 1998 and 1997.
Six Months Ended Three Months Ended
June 30, June 30,
-------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
Data processing $ 475 $ 586 $ 239 $ 354
Marketing expenses 377 329 208 164
Office supplies, postage
and telephone 618 711 311 401
Bank Insurance 271 252 120 144
Supervisory Assessments 54 72 43 29
Professional Expenses 666 460 508 95
Provision for OREO Loss 343 180 -- 155
Provision for Y2K 200 -- 200 --
Expense
Other Expenses 1,293 1,663 508 1,167
------ ------ ------ ------
Total Other Expenses $4,297 $4,253 $2,137 $2,509
====== ====== ====== ======
Page 7 of 16
8
Notes to Condensed Consolidated Financial Statements (continued)
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):
Six Months Ended June 30, Three Months Ended June 30,
------------------------------------------- ----------------------------------------
1998 1997 1998 1997
------------------- -------------------- ------------------ ------------------
Income Shares Income Shares Income Shares Income Shares
------- ------ ------- ------ ------- ------ ------- ------
Net income as reported $ 2,238 $ 2,147 $ 1,234 $ 1,014
Shares outstanding at
period end* 5,979 5,797 5,979 5,797
Impact of weighting
shares purchased
during the period (72) (46) (53) (25)
------- ----- ------- ----- ------- ----- ------- ------
Used in Basic EPS 2,238 5,908 2,147 5,751 1,234 5,926 1,014 5,772
Dilutive effect of
outstanding stock
options 412 343 412 343
------- ----- ------- ----- ------- ----- ------- ------
Used in Dilutive EPS $ 2,238 6,320 $ 2,147 6,094 $ 1,234 6,338 $ 1,014 6,115
======= ===== ======= ===== ======= ===== ======= ======
- ------------
* Number of shares retroactively adjusted to reflect 15% stock dividend declared
subsequent to end of period.
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.
Page 8 of 16 pages
9
Notes to Condensed Consolidated Financial Statements (continued)
Note #5 - Disclosures about Fair Value of Financial Instruments (Continued)
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.
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 June 30, 1998.
The estimated fair value of the Bank's financial instruments are as
follows:
June 30, 1998
---------------------------
Carrying Amount Fair Value
--------------- ----------
(dollars in thousands)
Financial Assets
Cash and cash equivalents $ 73,436 $ 73,436
Investment securities and deposits 82,907 83,012
Loans 285,354 285,305
Direct lease financing 3,974 3,997
Financial Liabilities
Deposits 414,783 415,031
Long term debt 99 99
Unrecognized Financial Instruments
Commitments to extend credit 53,634 53,634
Standby letters of credit 2,342 2,342
Page 9 of 16 pages
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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.
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 $131,000, or 2.1% and
$357,000 or 2.9%, respectively, in the three and six-month periods ended June
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 $244,000 or 2.8% and
$454,000 or 2.6%, respectively, in the three and six-month periods ended June
30, 1998 that more than offset increases in interest expense of $113,000 or 4.7%
and $95,000 or 2.0%, respectively, in those same 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 generally 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, which bear higher rates of interest, and are more sensitive to changes in
prevailing interest rates, than other types of deposits. 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, including those in denominations of more 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 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. The Bank's management has elected
to allow maturing TCD's to "run-off" and has initiated 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 $31,591,000, or 12.2% in six months ended June 30, 1998
compared to the same period in 1997 and, at June 30, 1998 such deposits
represented 73% of the Bank's total deposits as compared to 70% at June 30,
1997. The change in the mix of deposits and somewhat lower rates paid on
interest bearing deposits enabled the Bank to improve its net interest margin
(i.e., net interest income stated as a percentage of interest income) for the
six months ended June 30, 1998 to 72.0% from 71.8% in the same six months of
1997.
The ability of the Bank to maintain its net interest margin is not
entirely within its control because the interest rates the Bank is able to
charge on loans and the interest rates it must offer to maintain and attract
deposits are affected by national monetary policies established and implemented
by the Federal Reserve Board and by competitive conditions in the Bank's service
areas. In addition, the effect on a bank's net interest margins of changes in
market rates of interest will depend on the types and maturities of its deposits
and earning assets. For
Page 10 of 16 Pages
11
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 $100,000 and $375,000,
respectively, in the three and six-month periods ending June 30, 1998 compared
to provisions of $50,000 and $331,000 for the corresponding periods of 1997. Net
loan charge-offs for the six months ended June 30, 1998, aggregated $207,000,
representing seven hundredths of one percent (0.07%) of average loans and
leases, as compared to net loan charge-offs for the same period in 1997 of
$991,000, which represented thirty-five hundredths of one percent (0.35%) of
average loans and leases outstanding.
OTHER INCOME. Other income declined by $132,000 or 9.2% and by $278,000
or 9.9% in the three and six month periods ended June 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 the sale of foreclosed properties and 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 quarter of 1998, is a $200,000 charge to
establish a reserve for potential expenses associated with compliance with Year
2000 ("Y2K") issues.
Non-interest expense declined by approximately $398,000, or 6.5%, and
$83,000, or 0.7%, in the three and six month periods ended June 30, 1998,
compared to the same three and six month periods of 1997, partially due to
reductions in data processing costs and furniture and equipment expenses. As a
result of those decreases, non-interest expense represented 73.4% and 74.2%,
respectively, of operating income (net interest income plus other income), for
the three and six months ended June 30, 1998 compared to 78.5% and 75.1%,
respectively, for the same periods in 1997.
INCOME TAXES. Income taxes increased by approximately $127,000 or 20.8%
and $27,000 or 2.1% during the three and six month periods ended June 30, 1998
compared to the same periods of 1997, primarily as a result of the increase in
pre-tax income achieved during the three and six month periods ended June 30,
1998.
FINANCIAL CONDITION AND LIQUIDITY
The Company's total assets increased by approximately $27,829,000, or
6.4%, during the six months from January 1, 1998 to June 30, 1998, while average
total assets during that same six-month period increased by $13,621,000 or
3.2%.
At June 30, 1998, the Company had adequate cash resources with
approximately $41,803,000 of cash held on deposit at other financial
institutions, $70,940,000 of investment securities and $43,600,000 in Federal
funds sold.
Page 11 of 16 pages
12
The Bank is continuing its marketing programs that are designed to
increase the volume of demand, savings and money market deposits, which are
either non-interest bearing or bear interest at rates which are substantially
lower than those paid on time deposits. At the same time, management has kept
the interest rates it offers on TCDs, 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 June 30, 1998, the volume of demand deposits and savings
deposits at the Bank was $22,883,000, or 8.2%, higher than at December 31, 1997
and non-interest-bearing demand deposits, as a percentage of total deposits
increased to 33.2% at June 30, 1998 from 32.7% at December 31, 1997. By
contrast, the volume of outstanding TCD's in denominations of more than $100,000
declined by $1,966,000, or 4.0%, from the volume of such deposits that were
outstanding at December 31, 1997.
CAPITAL RESOURCES. It is the policy of the Board of Directors to retain
earnings to support the growth of the Bank rather that to pay cash dividends.
Those earnings have been used to open two new banking offices during 1995 and a
third office in March of 1996. The Company is evaluating opportunities to expand
the Bank's market coverage and is seeking to open at least one additional
banking office during 1998.
On April 16 1998, the Company declared a 15% stock dividend to
shareholders of record on June 15, 1998. This 15% stock dividend follows three
years of consecutive 10% stock dividends. The 15% dividend was distributed on
July 7, 1998 and 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 six months of 1998
and the retention of internally generated funds, the Company's total
shareholders' equity increased by approximately $3,081,000 or 7.3% to
$45,122,000 at June 30, 1998 from $42,041,000 at December 31, 1997. As a result,
the Bank's Tier 1 leverage ratio was 9.8% at June 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.
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, 1998, the Company recorded a valuation
reserve for unrealized losses on such securities aggregating approximately
$272,000, all of which relates to certain investments in mutual funds, which are
classified as investments in marketable equity securities, and which the Company
has held for several years and intends to continue to hold for the foreseeable
future.
YEAR 2000. The Company is currently working to resolve the potential
impact of the year 2000 on the processing of date-sensitive information by the
Company's computerized information systems. The Year 2000 problem is the result
of computer programs being written using two digits (rather that four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, it is currently believed that the costs of addressing
potential problems will not have a material adverse impact on the Company's
financial position, results of operations or liquidity in future periods.
However, if the Company is unable to resolve such processing issues in a timely
manner, it could result in a material financial risk. Accordingly, the Company
plans to devote the necessary resources to resolve all significant Year 2000
issues in a timely manner, and has established a reserve for expenses associated
with resolving these issues as mentioned previously in this report. However,
even if the Company is able to resolve any such issues with respect to its
computerized information systems, there is no assurance that customers who
utilize computer information systems to effectuate banking transactions, or the
Company's vendors or financial institutions with which the Company does
business, will not encounter problems that could adversely affect the Company's
business.
Page 12 of 16 pages
13
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 12, 1998.
(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 Number of Number of
Nominee/Director Votes "For" Votes "Withheld"
- -------------------------------- ------------------------------- -------------------------------
George E. Langley 4,229,510 13,086
- -------------------------------- ------------------------------- -------------------------------
Douglas F. Tessitor 4,229,180 13,416
- -------------------------------- ------------------------------- -------------------------------
Max E. Williams 4,228,698 13,898
- -------------------------------- ------------------------------- -------------------------------
Directors Continuing in Office. The terms of office of the following
incumbent directors extend to 1999 and, therefore, they did not stand for
re-election at the 1998 Annual Meeting: Richard H. Barker, Charles G. Boone,
William V. Landecena, and O. L. Mestad.
ITEM 5. OTHER INFORMATION
None.
ITEM 6, EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
27. Financial Data Schedule
(B) Reports on Form 8-K: None.
Page 13 of 16 pages
14
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.
FOOTHILL INDEPENDENT BANCORP
Date: August 11, 1998 By: /s/ CAROL ANN GRAF
---------------------------
CAROL ANN GRAF
Senior Vice President
Chief Financial Officer
Assistant Secretary
S-1
15
INDEX TO EXHIBITS
Sequentially
Exhibit Description Numbered Page
------- ----------- -------------
Exhibit 27. Financial Data Schedule