1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________________
Commission file number 0-11337
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FOOTHILL INDEPENDENT BANCORP
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(Exact name of Registrant as specified in its charter)
DELAWARE 95-3815805
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
510 SOUTH GRAND AVENUE, GLENDORA, CALIFORNIA 91741
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(Address of principal executive offices) (Zip Code)
(626) 963-8551 or (909) 599-9351
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(Registrant's telephone number, including area code)
Not Applicable
-----------------------------------
(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.
5,343,697 shares of Common Stock
as of August 4, 2000
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PART I - FINANCIAL STATEMENTS
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
June 30, December 31,
2000 1999
--------- ------------
ASSETS Cash and due from banks $ 30,683 $ 23,262
Federal funds sold 8,100 3,600
--------- ---------
Total Cash and Cash Equivalents 38,783 26,862
--------- ---------
Interest-bearing deposits in other financial institutions 1,979 7,919
--------- ---------
Investment Securities Held-To-Maturity (approximate market
value $20,114 in 2000 and $7,245 in 1999
U.S. Treasury 998 2,997
U.S. Government Agencies 16,370 1,000
Municipal Agencies 922 1,062
Other Securities 2,250 2,250
--------- ---------
Total Investment Securities Held-To-Maturity 20,540 7,309
--------- ---------
Investment Securities Available-For-Sale 46,499 56,015
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Loans, net of unearned discount and prepaid points and fees 358,309 343,294
Direct lease financing 1,301 2,341
Less reserve for possible loan and lease losses (3,702) (6,102)
--------- ---------
Total Loans & Leases, net 355,908 339,533
--------- ---------
Bank premises and equipment 6,854 6,779
Accrued interest 2,758 2,928
Other real estate owned, net of allowance for
possible losses of $0 in 2000 and $42 in 1999 2,421 1,714
Cash surrender value of life insurance 5,329 4,997
Prepaid expenses 1,075 1,618
Deferred tax asset 2,277 2,412
Other assets 570 590
--------- ---------
Total Assets $ 484,993 $ 458,676
========= =========
LIABILITIES AND Deposits
STOCKHOLDERS'
EQUITY
Demand deposits $ 144,197 $ 133,115
Savings and NOW deposits 103,562 101,839
Money market deposits 73,671 72,400
Time deposits in denominations of $100,000 or more 46,253 40,408
Other time deposits 67,850 49,502
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Total deposits 435,533 397,264
--------- ---------
Accrued employee benefits 1,967 2,002
Accrued interest and other liabilities 1,452 2,152
Short-term debt 8,800
Long-term debt 19
--------- ---------
Total Liabilities 438,952 410,237
--------- ---------
Stockholders' Equity
Common Stock par value $.001 per share - authorized:
25,000,000 shares; issued outstanding: 5,337,861 shares
in 2000 and 5,772,614 in 1999 36,581 36,415
Additional Paid-in Capital 963 963
Retained Earnings 9,042 11,898
Accumulated Other Comprehensive Income (545) (837)
--------- ---------
Total Stockholders' Equity 46,041 48,439
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 484,993 $ 458,676
========= =========
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 16,677 $ 14,444 $ 8,255 $ 7,464
Interest on investment securities
U.S. Treasury 48 282 13 121
Obligations of other U.S. government agencies 1,250 1,312 609 620
Municipal agencies 161 177 79 89
Other securities 485 664 316 308
Interest on deposits 94 408 34 208
Interest on Federal funds sold 274 291 163 139
Lease financing income 46 92 19 44
--------------------------------------------------
Total Interest Income 19,035 17,670 9,488 8,993
--------------------------------------------------
INTEREST EXPENSE
Interest on savings & NOW deposits 777 768 389 386
Interest on money market deposits 1,473 1,352 757 693
Interest on time deposits in denominations
of $100,000 or more 1,212 814 657 362
Interest on other time deposits 1,586 1,249 909 618
Interest on borrowings 48 3 4 1
--------------------------------------------------
Total Interest Expense 5,096 4,186 2,716 2,060
--------------------------------------------------
Net Interest Income 13,939 13,484 6,772 6,933
PROVISION FOR LOAN AND LEASE LOSSES 475 280 455 124
--------------------------------------------------
Net Interest Income After Provisions
for Loan and Lease Losses 13,464 13,204 6,317 6,809
--------------------------------------------------
OTHER INCOME
Fees and service charges 2,140 2,215 1,139 1,154
Gain on sale SBA loans 6 100 4 72
Other 56 23 29 23
--------------------------------------------------
Total other income 2,202 2,338 1,172 1,249
--------------------------------------------------
OTHER EXPENSES
Salaries and benefits 5,026 4,790 2,331 2,441
Occupancy expenses, net of revenue
of $94 in 2000 and $86 in 1999 1,114 1,036 571 526
Furniture and equipment expenses 777 825 390 420
Other expenses (Note 2) 3,639 4,064 1,618 2,219
--------------------------------------------------
Total Other Expenses 10,556 10,715 4,910 5,606
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INCOME BEFORE INCOME TAXES 5,110 4,827 2,579 2,452
--------------------------------------------------
PROVISION FOR INCOME TAXES 1,888 1,762 953 895
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NET INCOME $ 3,222 $ 3,065 $ 1,626 $ 1,557
==================================================
EARNINGS PER SHARE (Note 3)
Basic $ 0.58 $ 0.52 $ 0.30 $ 0.26
--------------------------------------------------
Diluted $ 0.55 $ 0.49 $ 0.29 $ 0.25
--------------------------------------------------
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2000 1999
----------- -----------
Cash Flows From Operating Activities:
Interest and fees received $ 19,097 $ 17,753
Service fees and other income received 1,872 2,084
Financing revenue received under leases 46 92
Interest paid (4,861) (4,335)
Cash paid to suppliers and employees (10,126) (11,406)
Income taxes paid (1,891) (1,344)
----------- -----------
Net Cash Provided by (Used in) Operating Activities 4,137 2,844
----------- -----------
Cash Flows From Investing Activities:
832,832 1,057,405
Proceeds from maturity of investment securities (AFS)
Purchase of investment securities (AFS) (838,198) (1,041,015)
Proceeds from maturity of investment securities (HTM) 2,140 5,005
Purchase of investment securities (HTM) (1) (4,003)
Proceeds from maturity of deposits in other financial institutions 9,902 15,830
Purchase of deposits in other financial institutions (3,962) (18,113)
Net (increase) decrease in credit card and revolving credit receivables 8 93
Recoveries on loans previously written off (25) 119
Net (increase) decrease in loans (18,106) (19,046)
Net (increase) decrease in leases 1,040 953
Proceeds from property, plant and equipment 20 20
Capital expenditures (1,420) (589)
Proceeds from sale of other real estate owned -- 99
Stock repurchased and retired (5,226) (1,820)
----------- -----------
Net Cash Provided by (Used in) Investing Activities (20,996) (5,062)
=========== ===========
Cash Flows From Financing Activities:
Net increase in demand deposits, NOW accounts, 14,092 8,702
savings accounts, and money market deposits
Net increase in certificates of deposit with
maturities of three months or less 2,257 3,393
Net increase (decrease) in certificates of deposit
with maturities of more than three months 21,936 (11,606)
Net increase (decrease) in short term borrowing (8,800) --
Proceeds from exercise of stock options 24 95
Proceeds from stock issued under employee benefit and
dividend reinvestment plans 142 159
Principal payment on long term debt (19) (27)
Dividends paid (852) (1,481)
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Net Cash Provided by Financing Activities 28,780 (765)
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Net Increase (Decrease) in Cash and Cash Equivalents 11,921 (2,983)
Cash and Cash Equivalents at Beginning of Year 26,862 37,482
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Cash and Cash Equivalents at June 30, 2000 and 1999 $ 38,783 $ 34,499
=========== ===========
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
2000 1999
-------- --------
Net Income $ 3,222 $ 3,065
======== ========
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization 657 640
Provision for possible credit losses 475 280
Provision for possible OREO losses 42 (41)
(Gain)/loss on sale of equipment 2 3
Provision for deferred taxes 135 136
Increase/(decrease) in taxes payable (138) 282
(Increase)/decrease in other assets 30 (128)
(Increase)/decrease in interest receivable 170 106
Increase/(decrease) in discounts and premiums (62) 69
Increase/(decrease) in interest payable 235 (149)
(Increase)/decrease in prepaid expenses 543 (984)
Increase/(decrease) in accrued expenses and other liabilities (842) (178)
Increase in cash surrender value of life insurance (332) (257)
-------- --------
Total Adjustments 915 (221)
-------- --------
Net Cash Provided (Used) by Operating Activities $ 4,137 $ 2,844
======== ========
DISCLOSURE OF ACCOUNTING POLICY
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and Federal funds sold. Generally, Federal funds
are purchased and sold for one-day periods.
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Accumulated
Number of Additional Other
Shares Capital Paid-In Comprehensive Retained Comprehensive
Outstanding Stock Capital Income Earnings Income Total
----------- ---------- ---------- ------------- ---------- -------------- ----------
BALANCE - January 1, 1999 5,985,244 $ 36,057 $ 963 $ 11,516 $ (157) $ 48,379
Cash dividend (1,481) (1,481)
Exercise of stock options 13,869 95 95
Common stock issued under
employee benefit and
dividend reinvestment plans 10,872 159 159
Common stock repurchased,
cancelled and retired (121,950) (1,820) (1,820)
Comprehensive Income 3,065 3,065 3,065
Net Income
Unrealized security holding
losses (Net of taxes $54) (410) (410) (410)
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Total Comprehensive Income $ 2,655
---------- ---------- ---------- ========== ---------- ---------- ----------
BALANCE - June 30, 1999 5,888,035 $ 36,111 $ 963 $ 11,280 $ (567) $ 47,987
========== ========== ========== ========== ========== ==========
BALANCE - January 1, 2000 5,772,614 36,415 963 11,898 (837) 48,439
Cash dividend (852) (852)
Exercise of stock options 4,048 24 24
Common stock issued under
employee benefit and
dividend reinvestment plans 14,678 142 142
Common stock repurchased,
cancelled and retired (453,479) (5,226) (5,226)
Comprehensive Income
Net Income 3,222 3,222 3,222
Unrealized security holding
gains (Net of taxes $134) 292 292 292
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Total Comprehensive Income $ 3,514
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---------- ---------- ---------- ---------- ---------- ----------
BALANCE - June 30, 2000 5,337,861 $ 36,581 $ 963 $ 9,042 $ (545) $ 46,041
========== ========== ========== ========== ========== ==========
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
JUNE 30, 2000 AND 1999
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, 1999.
NOTE #2 - OTHER EXPENSES
The following is a breakdown of other expenses for the six and three
month periods ended June 30, 2000 and June 30, 1999, respectively.
Six Months Ended Three Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
Data processing $ 533 $ 468 $ 280 $ 243
Marketing expenses 564 603 290 323
Office supplies, postage and
telephone 509 582 240 276
Bank Insurance 239 282 101 125
Supervisory Assessments 62 41 31 20
Professional Expenses 765 1,079 433 706
Provision for OREO Loss -- 46 -- 1
Provision for Y2K Expense (285) -- (285) --
Other Expenses 1,252 963 528 525
------- ------- ------- -------
Total Other Expenses $ 3,639 $ 4,064 $ 1,618 $ 2,219
======= ======= ======= =======
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 earnings per share (amounts
in thousands):
Six Months Ended June 30, Three Months Ended June 30,
--------------------------------------- ----------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
Income Shares Income Shares Income Shares Income Shares
------ ------ ------ ------ ------ ------ ------ ------
Net income as reported $3,222 $3,065 $1,626 $1,557
Shares outstanding at period end 5,338 5,888 5,338 5,888
Impact of weighting shares
purchased during the period 209 42 (6) 9
------ ------ ------ ------ ------ ------ ------ ------
Used in Basic EPS 3,222 5,547 3,065 5,930 1,626 5,332 1,557 5,897
Dilutive effect of
outstanding stock options 369 362 356 362
------ ------ ------ ------ ------ ------ ------ ------
Used in Dilutive EPS $3,222 5,916 $3,065 6,292 $1,626 5,688 $1,557 6,259
====== ====== ====== ====== ====== ====== ====== ======
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Notes to Condensed Consolidated Financial Statements (continued)
NOTE #4 - INCOME TAXES
The Bank adopted Statement No. 109 of the Financial Accounting Standards
Board, Accounting for Income Taxes, commencing January 1, 1993. This new
statement supersedes Statement No. 96 and among other things, changes the
criteria for the recognition and measurement of deferred tax assets. This
adoption does not create a material change in the financial statements of the
Bank or the Company.
NOTE #5 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement 107 is effective for
financial statements for fiscal years ending after December 15, 1992. The
Statement considers the fair value of financial instruments for both assets and
liabilities. The following methods and assumptions were used to estimate the
fair value of financial instruments.
Investment Securities
For U.S. Government and U.S. Agency securities, fair values are based on
market prices. For other investment securities, fair value equals quoted market
price if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities as the basis for a
pricing matrix.
Loans
The fair value for loans with variable interest rates is the carrying
amount. The fair value of fixed rate loans is derived by calculating the
discounted value of the future cash flows expected to be received by the various
homogeneous categories of loans. All loans have been adjusted to reflect changes
in credit risk.
Deposits
The fair value of demand deposits, savings deposits, savings accounts
and NOW accounts is defined as the amounts payable on demand at June 30, 2000.
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, 2000.
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Notes to Condensed Consolidated Financial Statements (continued)
The estimated fair values of the Bank's financial instruments are as
follows:
June 30, 2000
------------------------
Carrying Fair
Amount Value
-------- --------
(dollars in thousands)
Financial Assets
Cash and Cash equivalents $ 38,783 $ 38,783
Investment securities and deposits 69,018 66,315
Loans 358,501 355,227
Direct lease financing 1,301 1,291
Financial Liabilities
Deposits 435,533 435,740
Long term debt 0 0
Unrecognized Financial Instruments
Commitments to extend credit 50,484 50,484
Standby letters of credit 884 884
NOTE # 6 - NON-PERFORMING LOANS
The following table sets forth information regarding the Bank's
non-performing loans at June 30, 2000 and December 31, 1999.
June 30, December 31,
2000 1999
-------- ------------
(dollars in thousands)
Accruing Loans More Than 90 Days Past Due(1)
Aggregate Loan Amounts
Commercial, financial and agricultural $ -- $ 148
Real Estate 465 50
Installment loans to individuals 1 4
Aggregate Leases -- --
Total Loans Past Due More Than 90 Days 466 202
Troubled Debt Restructurings(2) 1,769 1,780
Non-accrual loans(3) 3,271 6,068
-------- --------
Total Non-Performing Loans $ 5,506 $ 8,050
======== ========
- ----------
(1) Reflects loans for which there has been no payment of interest and/or
principal for 90 days of more. Ordinarily, loans are placed on non-accrual
status (accrual of interest is discontinued) when the Bank has reason to
believe that continued payment of interest and principal is unlikely.
(2) Renegotiated loans are those which have been renegotiated to provide a
deferral of interest or principal.
(3) There were 8 loans on non-accrual status totaling approximately $3,271,000
at June 30, 2000 and 14 loans totaling approximately $6,068,000 at December
31, 1999.
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Notes to Condensed Consolidated Financial Statements (continued)
The policy of the Company is to review each loan in the loan portfolio
to identify problem credits. In addition, as an integral part of its review
process of the Bank, the Federal Reserve Bank and the California Department of
Financial Institutions also classifies problem credits. There are three
classifications for problem loans: "substandard", "doubtful", and "loss".
Substandard loans have one defined weaknesses and are characterized by the
distinct possibility that the Bank will sustain some loss if the deficiencies
are not corrected. Doubtful loans have the weaknesses of substandard loans with
the additional characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently existing facts, conditions, and values,
questionable. A loan classified as "loss" is considered uncollectible and of
such little value that the continuance as an asset of the institution is not
warranted. Another category designated "special mention" is maintained for loans
which do not currently expose the Bank to a significant degree of risk to
warrant classification as substandard, doubtful or loss, but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
As of June 30, 2000, the Bank's classified loans consisted of
approximately $11,376,885 of loans classified as substandard. There were no
loans classified as doubtful. The Bank's $11,376,885 of loans classified as
substandard consisted of approximately $8,105,701 of performing and accruing
loans and approximately $3,271,184 of non-accrual loans.
NOTE # 7 - RESERVE FOR LOAN AND LEASE LOSSES
The reserve for loan and lease losses is a general reserve established
by Management to absorb potential losses inherent in the entire portfolio. The
level of and ratio of additions to the reserve are based on a continuous
analysis of the loan and lease portfolio and, at June 30, 2000, reflected an
amount which, in Management's judgement, was adequate to provide for known and
inherent loan losses. In evaluating the adequacy of the reserve, Management
gives consideration to the composition of the loan portfolio, the performance of
loans in the portfolio, evaluations of loan collateral, prior loss experience,
current economic conditions and the prospects or worth of respective borrowers
or guarantors. In addition, the Federal Reserve Bank or Department of Financial
Institutions, as an integral part of their examination process, periodically
reviews the Bank's allowance for possible loan and lease losses. The examiners
may require the Bank to recognize additions to the allowance based upon their
judgement of the information available to it at the time of its examination. The
Bank was most recently examined by the Federal Reserve Bank as of March 31,
2000.
The reserve for loan and lease losses at June 30, 2000, was $3,702,000
or 1.03% of total loans and leases. Additions to the reserve are effected
through the provision for loan losses which is an operating expense of the
Company.
The following table provides certain information with respect to the
Company's allowance for loan losses as well as charge-off and recovery activity.
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Notes to Condensed Consolidated Financial Statements (continued)
June 30, December 31,
2000 1999
-------- ------------
(dollars in thousands)
Allowance for Loan Losses
Balance, Beginning of period $ 6,102 $ 5,576
-------- --------
Charge-Offs
Commercial, financial and agricultural (3,066) (112)
Real estate - construction -- --
Real estate - mortgage -- (45)
Consumer Loans (6) (39)
Lease Financing -- --
Other -- --
-------- --------
Total Charge-Offs (3,072) (196)
-------- --------
Recoveries
Commercial, financial and agricultural 21 44
Real estate - construction -- --
Real estate - mortgage 169 188
Consumer loans 7 5
Lease Financing -- --
Other -- --
-------- --------
Total Recoveries 197 237
-------- --------
Net Recoveries (Charge-Offs) (2,875) 41
Provision Charged to Operations 475 485
-------- --------
Balance, End of period $ 3,702 $ 6,102
======== ========
Net Charge-Offs During the Period to
Average Loans Outstanding During the Period Ended 0.81% -0.01%
======== ========
Allowance for Loan Losses to Total Loans 1.03% 1.76%
======== ========
For additional information regarding the loan charge-offs in the quarter
ended June 30, 2000, see "MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS --RESULTS OF OPERATIONS -- Provision for Loan and Lease
Losses."
In accordance with SFAS No. 114 (as amended by SFAS No. 118),
"Accounting by Creditors for Impairment of a Loan," loans identified as
"impaired" are measured on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable market
price, or the fair value of the collateral if the loan is collateral dependent.
A loan is impaired when it is probable the creditor will not be able to collect
all contractual principal and interest payments due in accordance with the terms
of the loan agreement. Loan impairment is evaluated on a loan-by-loan basis as
part of normal loan review procedures of the Bank.
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Notes to Condensed Consolidated Financial Statements (continued)
NOTE # 8 - MARKET RISK
The Company's management utilizes the results of a dynamic simulation
model to quantify the estimated exposure of net interest income to sustained
interest rate changes. The simulation model estimates the impact of changing
interest rates on the interest income from all interest earning assets and the
interest expense paid on all interest bearing liabilities reflected on the
Company's balance sheet. This sensitivity analysis is compared to policy limits
which specify maximum tolerance level for net interest income exposure over a
one year horizon assuming no balance sheet growth, given both a 200 basis point
upward and downward shift in interest rates. A parallel and pro rata shift in
rates over a 12-month period is assumed.
The Company does not engage in any hedging activities and does not have
any derivative securities in its portfolio.
The following reflects the Company's net interest income sensitivity
analysis as of June 30, 2000:
(Dollars in Thousands)
Estimated Net Market Value
Interest ------------------------------
Simulated Rate Changes Income Sensitivity Assets Liabilities
------------------------ -------------------- ----------- -----------
+200 basis points -9.43% $ 469,397 $ 435,599
-200 basis points 7.57% $ 502,764 $ 437,583
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Our principal operating subsidiary, Foothill Independent Bank, which is
a California state chartered bank (the "Bank"), accounts for substantially all
of our revenues and income. Accordingly, the following discussion focuses
primarily on its operations and financial condition.
RESULTS OF OPERATIONS
OVERVIEW. During the first half of 2000, we generated net earnings of
$3,222,000, which represented an increase of $157,000, or 5%, over net earnings
in the first half of 1999. That increase was due primarily to a reduction in
non-interest expense, and, to a lesser extent, an increase in interest income,
which was partially offset by an increase in interest expense. Net earnings for
the six months ended June 30, 2000 represented an annualized return on average
assets of 1.37% and an annualized return on average equity of 13.85%, compared
to 1.32% and 12.94%, respectively, for the same six months of 1999.
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 $455,000, or 3.4%, in the six month
period ended June 30, 2000, as compared to the same period of 1999, primarily as
a result of a $1,365,000, or 7.7%, increase in interest income that more than
offset an increase in interest expense of $910,000, or 21.7%. The increase in
interest income was attributable primarily to increases in the volume of
outstanding loans, and, to a lesser extent, increases in interest charged on
loans in response to increases in market rates of interest. The increase in
interest expense was due primarily to increases in the volume of time
certificates of deposits ("time deposits"), including those in denominations of
$100,000 or more ("TCD's") on which the Bank pays its highest rates of interest.
Primarily as a result of that increase in the volume of time deposits in the
second quarter of 2000, interest expense increased by $656,000, or 31.8%, which
more than offset an increase of 495,000, or 5.5%, in interest income. As a
result, net interest income for the second quarter of 2000 declined by $161,000,
or 2.3%, compared to the second quarter of 1999.
RATE SENSITIVITY, MARKET RISK AND NET INTEREST MARGINS.
RATE SENSITIVITY. Like other banks and bank holding companies, our
margins (that is, the difference between yields we are able to realize on loans
and other interest earning assets and the interest we pay on deposits) are
affected by a number of factors including the relative percentages or the "mix"
of (i) our assets, between loans, on the one hand, on which we are 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 yields generally are lower; (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 time deposits 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 be withdrawn in order to
reduce interest expense.
NET INTEREST MARGIN. We attempt to reduce our exposure to interest rate
changes and, thereby, at least to maintain and, if possible, to increase, our
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
13
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and other time deposits, and (ii) to match opportunities to "reprice" earning
assets, particularly loans, in response to changes in market rates of interest
which require or cause repricing of deposits. At the end of 1999, we made the
decision to offer programs designed to bring more time deposits into the Bank,
after two years of allowing those deposits to "run off". As a result, demand and
savings (including money market) deposits represented 74% of average total
deposits at June 30, 2000, with time deposits representing 26%, as compared to
79% and 21%, respectively, at December 31, 1999, and 73% and 27%, respectively,
at June 30, 1999.
As a result, in the quarter and six months ended June 30, 2000, our net
interest margin (i.e., tax-adjusted net interest income stated as a percentage
of average interest-earning assets) was 6.30% and 6.55%, respectively, compared
to 6.74% and 6.56% for the corresponding periods of 1999. However, our net
interest margin continues to exceed the average net interest margin for
California-based, publicly traded banks and bank holding companies with assets
ranging from $250-to-$750 million (the "Peer Group Banks").
The ability to maintain our net interest margin is not entirely within
our control because the interest rates we are able to charge on loans and the
interest rates we 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 our 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.
MARKET RISK. Market risk is the risk of loss to future earnings, to fair
values of assets or to future cash flows that may result from changes in the
price or value of a financial instrument. The value of a financial instrument
may change as a result of changes in interest rate and other market conditions.
Market risk is attributed to all market risk sensitive financial instruments,
including loan and investment securities, deposits and borrowings. We do not
engage in trading activities or participate in foreign currency transactions for
our own account. Accordingly, our exposure to market risk is primarily a
function of our asset and liability management activities and of changes in
market rates of interest that can cause or require increases in the rates we pay
on deposits that may take effect more rapidly or may be greater than the
increases in the interest rates we are able to charge on loans and the yields
that we can realize on our investments. The extent of that market risk, depends
on a number of variables, including the sensitivity to changes in market
interest rates and the maturities of our interest earning assets and our
deposits. See "Rate Sensitivity" above.
We use a dynamic simulation model to forecast the anticipated impact of
changes in market interest rates on our net interest income. That model is used
to assist management in evaluating, and in determining and adjusting strategies
designed to reduce, our exposure to these market risks, which may include, for
example, changing the mix of earning assets or interest-bearing deposits. See
Note 8 to our Condensed Consolidated Financial Statements contained in Part I of
this Report for further information with respect to that dynamic simulation
model that, based on certain assumptions, attempts to quantify the impact that
simulated upward and downward interest rate changes would have on our net
interest income.
PROVISION FOR LOAN AND LEASE LOSSES. We follow 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 economic conditions. During the
second quarter of 2000, we charged off $3.055 million of non-accrual loans to
their net realizable value, due to the bankruptcy of a large corporate borrower.
These losses had had been fully reserved for in our Loan Loss Reserve by means
of provisions for loan losses that we made in previous years and, as a result,
these charge-offs had no effect on our operating results during the six months
or
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quarter ended June 20, 2000. The charge off of those non-accrual loans resulted
in an overall improvement in the quality of our loan portfolio, as is indicated
by the following: the ratio of non-performing loans-to-total loans improved to
1.04% at June 30, 2000 from 2.08% at June 30, 1999; the ratio of non-performing
assets-to-total assets improved to 1.27% at June 30, 2000 compared to 1.94% at
June 30, 1999; and the ratio of non-performing loans-to-total loan loss reserve
improved to 1.49% at June 30, 2000 from 1.39% at June 30, 1999.
Excluding the above-mentioned loan charge-offs, recoveries of previously
"charged-off" loans exceeded loan charge-offs by $181,000 in the first six
months of 2000. By comparison, in the same six months of 1999, recoveries of
previously charged-off loans exceeded loan charge-offs by $99,000. See Note 7 to
our Condensed Consolidated Financial Statements contained in Part I of this
Report for further information with respect to an analysis of the Bank's loan
and lease loss experience for the first half of 2000 compared to the experience
for 1999.
Additions to the Loan Loss Reserve are made through a charge against
income referred to as the "provision for loan and lease losses." We made
provisions for potential loan and lease losses of $455,000 and $475,000,
respectively, in the three and six-month periods ended June 30, 2000, as
compared to $124,000 and $280,000 for the corresponding periods of 1999; and, at
June 30, 2000, the Loan Loss Reserve was approximately $3,702,000 or 1.03% of
total loans and leases outstanding, compared to approximately $5,955,000 or
1.91% of total loans and leases outstanding at June 30, 1999.
OTHER INCOME. Other income decreased by $77,000 or 6.2%, and $136,000 or
5.8%, in the quarter and six-month periods ended June 30, 2000, compared to the
same periods of 1999, because other income in the in the first half of 1999
included a one-time gain on the sale of SBA loans. Decreases in transaction fees
and service charges collected on deposits and other banking transactions also
contributed, to a lesser extent, to this decline in other income.
OTHER EXPENSE. Other expense (also often 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, professional expenses, and charges that are periodically made
against income to establish reserves for possible losses on the disposition or
declines in market values of real properties acquired on or in lieu of
foreclosure of defaulted loans (commonly referred to as "other real estate
owned" or "OREO").
In order to attract a higher volume of non-interest bearing demand and
lower cost savings and money market deposits and, thereby, improve the Bank's
net interest margin, it has been our policy to provide a much higher level of
personal service to our customers than the level of services that are provided
by many of our competitors. As a result, our net interest margin has usually
exceeded the average net interest margin of the Peer Group Banks.
Nevertheless, during the 1999 and continuing into 2000, we implemented a
number of cost reduction programs designed to reduce non-interest expenses and,
thereby increase operating efficiencies, without adversely affecting the quality
of service we provide to our customers. As a result of those programs, during
the three and six month periods ended June 30, 2000, we reduced our operating
expenses by $159,000 and $696,000, respectively, compared to the same periods of
1999. Those expense reductions resulted in improvements in our efficiency ratio
(that is, basically, the ratio of non-interest expense to the sum of our net
interest income and other income) to 64.7% and 65.3%, respectively, in the three
and six month periods ended June 30, 2000, from 68.5% % and 67.7%, respectively,
for the same three and six month periods of 1999.
INCOME TAXES. Income taxes increased by approximately $58,000 or 6.5%
and $126,000 or 7.2%, respectively, during the three and six month periods ended
June 30, 2000 compared to the same periods of 1999, primarily as a result of the
increases in pre-tax income.
FINANCIAL CONDITION
Our total assets increased during the six months ended June 30, 2000 by
$26,317,000 or 5.7%, when compared to total assets at December 31, 1999. Average
assets at June 30, 2000 were $10,898,000 or 2.3%, higher than total average
assets at December 31, 1999. As mentioned above, in the latter part of 1999 we
implemented programs designed to attract additional time deposits primarily to
fund increases in the volume of our loans. As a
15
16
result the volume of time deposits grew at a greater rate than did the volume of
demand, savings and money market deposits during the six months ended June 30,
2000. However, despite that growth, the volume of demand, savings and money
market deposits at the Bank represented 73.8% of total deposits at June 30,
2000, as compared to only 26.2% for time deposits, and time deposits in
denominations of $100,000 or more increased to only 10.6% of total deposits at
June 30, 2000 from 10.2% of total deposits at December 31, 1999.
LIQUIDITY MANAGEMENT. Liquidity management policies attempt to achieve a
matching of sources and uses of funds in order to enable us to fund our
customers' requirements for loans and for deposit withdrawals. In conformity
with those policies, we maintain a number of short-term sources of funds to meet
periodic increases in loan demand and deposit withdrawals and maturities. At
June 30, 2000, the principal sources of liquidity consisted of $30,683,000 of
cash and demand balances due from other banks; $8,100,000 in Federal funds sold;
$9,534,000 in short-term (maturities of 45 days or less) commercial paper; and
$4,000,000 in an overnight repurchase agreement, which, together, totaled
$52,317,000, as compared to $27,862,000 at December 31, 1999. Other sources of
liquidity include $46,499,000 in securities available-for-sale, of which
approximately $12,015,000 mature within one year; and $1,979,000 in interest
bearing deposits at other financial institutions, which mature in 6 months or
less. We also have established facilities enabling us to borrow up to
$10,100,000 of Federal funds from other banks and we have an unused $6,447,000
line of credit with the Federal Home Loan Bank. During the third quarter of 1999
we also received approval from the Federal Reserve Bank of San Francisco to
establish an account that will also allow us to borrow at their discount window
should the need arise. Additionally, substantially all of our installment loans
and leases, the amount of which aggregated $7,312,000 at June 30, 2000, require
regular installment payments from customers, providing us with a steady flow of
cash funds. Accordingly, we believe that we have adequate cash and cash
equivalent resources to meet any increases in demand for loans-and leases and
any increase in deposit withdrawals that might occur in the foreseeable future.
CAPITAL RESOURCES. The increases in earnings achieved since January 1,
1997 caused our capital ratios to increase in relation to regulatory capital
requirements. However, those increases in capital also caused our return on
average equity to remain relatively fixed despite the increases in earnings. As
a result, in 1998, our Board of Directors authorized an open market stock
repurchase program to be funded out of earnings. Between the commencement of
that program in late 1998 and March 31, 2000, we purchased a total of 709,721
shares of common stock for an aggregate price of approximately $8,818,000 and,
in June of 2000, the Board of Directors authorized the continuation of that
repurchase program for an additional 5% of the outstanding shares.
In September of 1999, the Board of Directors adopted a new cash dividend
policy which provides for the Company to pay quarterly cash dividends of $0.08
per share. Pursuant to that policy, quarterly cash dividends of $0.08 per share
were paid in January 2000, and May 2000, and a third such dividend was declared
in June 2000, which will be paid on August 22, 2000 to shareholders of record as
of August 7, 2000.
It has been and continues to be the objective of our Board of Directors
to retain earnings to meet capital requirements under applicable government
regulations and to support our growth. As a result, the Board may change the
amount or frequency of cash dividends to the extent that it deems necessary or
appropriate to achieve these objectives. For example the retention of earnings
in previous years enabled the Bank to fund the opening of four new banking
offices and extend the Bank's market areas, all of which have contributed to our
increased profitability and the maintenance of our capital adequacy ratios well
above regulatory requirements.
We continue to evaluate and explore opportunities to expand our market
into areas such as eastern Los Angeles County, western San Bernardino County,
north Orange County and northern Riverside County, all of which are contiguous
to our existing markets. We believe that the mergers and consolidations of a
number of independent banks that have occurred since 1997 have created
opportunities for us to increase our market share in those areas. We took
advantage of those opportunities within our existing market areas in 1998 and
1999, during which we established a substantial number of new customer
relationships and increased the volume of our demand, savings and money market
deposit balances obtained largely from customers of the merged banks who we
disaffected by the quality of services they were receiving. We believe that
there are still expansion and growth opportunities within and adjacent to our
existing market areas and in furtherance of our strategic plans designed to take
advantage of those opportunities, we plan to open our 12th banking office, in
the city of Temecula, California.
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At June 30, 2000, the Bank's Tier 1 leverage ratio and Tier 1 risk-based
capital ratio were 9.58% and 11.48%, respectively, which were in excess of
minimum bank regulatory requirements. Our consolidated Tier 1 risk-based capital
ratio was 11.52%. The risk-based capital ratio is determined by weighting our
assets in accordance with certain risk factors and, the higher the risk profile
of the 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 Tier 1
capital and Tier 1 risk-based capital ratios of the Bank compare favorably with
those of the Peer Group Banks.
Under accounting principles that address the financial reporting
requirements for investments in certain equity and debt securities held by
financial institutions, any unrealized gain on such securities is required to be
credited to, and any unrealized losses are required to be charged against,
stockholders' equity. At June 30, 2000, we recorded a valuation reserve for
unrealized losses on such securities aggregating approximately $545,000. A
substantial portion of this amount is related to certain investments in mutual
funds, which are classified as investments in marketable equity securities, but
which we have held for several years and intend to continue to hold for the
foreseeable future.
FORWARD LOOKING INFORMATION AND UNCERTAINTIES REGARDING FUTURE PERFORMANCE
This Report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains certain forward-looking
information, which reflects management's current views of future financial
performance. The forward-looking information is subject to certain risks and
uncertainties, including but not limited to the following:
INCREASED COMPETITION. Increased competition from other financial
institutions, mutual funds and securities brokerage and investment banking firms
that offer competitive loan and investment products could require us to reduce
interest rates and loan fees to attract new loans or to increase interest rates
that we offer on time deposits, either or both of which could, in turn, reduce
interest income and net interest margins.
POSSIBLE ADVERSE CHANGES IN LOCAL ECONOMIC CONDITIONS. Adverse changes
in local economic conditions could (i) reduce loan demand which could, in turn,
reduce interest income and net interest margins; (ii) adversely affect the
financial capability of borrowers to meet their loan obligations which, in turn,
could result in increases in loan losses and require increases in reserves for
possible loan losses, thereby adversely affecting earnings; and (iii) lead to
reductions in real property values that, due to our reliance on real property to
secure many of our loans, could make it more difficult for us to prevent losses
from being incurred on non-performing loans through the sale of such real
properties.
POSSIBLE ADVERSE CHANGES IN NATIONAL ECONOMIC CONDITIONS AND FRB
MONETARY POLICIES. Changes in national economic conditions, such as increases in
inflation or declines in economic output often prompt changes in Federal Reserve
Board monetary policies that could increase the cost of funds to us and reduce
net interest margins, particularly if we are unable, due to competitive
pressures or the rate insensitivity of earning assets, to effectuate
commensurate increases in the rates we are able to charge on existing or new
loans.
CHANGES IN REGULATORY POLICIES. Changes of federal and state bank
regulatory policies, such as increases in capital requirements or in loan loss
reserves, or changes in asset/liability ratios, could adversely affect earnings
by reducing yields on earning assets or increasing operating costs.
EFFECTS OF GROWTH. It is our intention to take advantage of
opportunities to increase our business, either through acquisitions of other
banks or the establishment of new banking offices. If we do acquire any other
banks or open any additional banking offices we are likely to incur additional
operating costs that may adversely affect our operating results, at least on an
interim basis, until any acquired bank is integrated into our operations or the
new banking offices are able to achieve profitability.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as of the date of this Quarterly Report, or to make predictions based
solely on historical financial performance.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
A Special Meeting of Shareholders of the Company was held on
April 25, 2000. Set forth below is a description of, and the outcome of the
vote, on each matter presented for a vote of the shareholders.
- ---------------------------------------------------------------------------------------------------------------------
VOTES SHARES BROKER OUTCOME
MATTER VOTES FOR AGAINST ABSTAINING NON-VOTES OF VOTE
------ --------- ------- ---------- --------- -------
- ---------------------------------------------------------------------------------------------------------------------
1. Change in State of Incorporation from
California to Delaware 3,171,128 1,315,027 29,430 630,804 Approved
- ---------------------------------------------------------------------------------------------------------------------
2. Classification of Board of
Directors into three classes 3,083,407 1,308,761 89,346 664,875 Approved
- ---------------------------------------------------------------------------------------------------------------------
3. Elimination of Cumulative
Voting in Election of Directors 3,278,467 1,103,289 99,756 664,405 Approved
- ---------------------------------------------------------------------------------------------------------------------
4. Requiring a Two-Third's Vote
of Shareholders to Amend the 3,307,605 1,426,436 53,629 358,719 Approved
Bylaws
- ---------------------------------------------------------------------------------------------------------------------
5. Requirement of Board Approval
for Shareholder Action to be
taken by Written Consent 2,994,719 1,420,790 104,945 625,935 Approved
- ---------------------------------------------------------------------------------------------------------------------
6. Restricting the Ability of
Shareholders to Call Special Not
Shareholder Meetings 2,845,265 1,539,677 135,470 625,977 Approved*
- ---------------------------------------------------------------------------------------------------------------------
7. An increase in the Authorized
Number of Shares of Common
Stock to 25 Million Shares 3,753,410 1,341,285 51,694 0 Approved
- ---------------------------------------------------------------------------------------------------------------------
8. Authorization of a new class Not
of 10 million Preferred Shares 2,871,259 1,543,285 109,739 622,106 Approved*
- ---------------------------------------------------------------------------------------------------------------------
- ----------
* The votes cast for approval of these two matters was less than a majority of
the number of shares outstanding, which was the vote required to approve these
matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
There were no Reports on Form 8-K for events occurring in
the quarter ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 10, 2000 FOOTHILL INDEPENDENT BANCORP
By: /s/ CAROL ANN GRAF
-------------------------------------
Carol Ann Graf
Senior Vice President and Chief
Financial Officer and Assistant
Secretary
S-1
20
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------ ----------- -------------
27 Financial Data Schedule
E-1