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 March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-11337
FOOTHILL INDEPENDENT BANCORP
----------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3815805
-------------------------------- ------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
510 SOUTH GRAND AVENUE, GLENDORA, CALIFORNIA 91741
-------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(818) 963-8551 or (909) 599-9351
(Registrants's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed, since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES /XX/. NO / /.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the issuer's classes of
common stock, as of the latest practicable date.
4,556,016 shares of Common Stock
as of April 28, 1997
<PAGE>
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS MARCH 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
Cash and due from banks $ 32,762 $ 33,673
Federal funds sold 23,900 14,900
--------- ---------
Total Cash and Cash Equivalents 56,662 48,573
--------- ---------
Interest-bearing deposits in other
financial institutions 2,078 3,957
--------- ---------
Investment Securities Held-To-Maturity
(approximate market value $15,888
in 1997 and $5,588 in 1996)
U.S. Treasury 13,394 2,796
Municipal Agencies 2,297 2,529
Other Securities 250 250
--------- ---------
Total Investment Securities
Held-To-Maturity 15,941 5,575
--------- ---------
Investment Securities Available-For-Sale 43,258 39,477
--------- ---------
Loans, net of unearned discount and
prepaid points and fees 277,407 291,766
Direct lease financing 4,309 2,864
Less reserve for possible loan
and lease losses (4,427) (4,744)
--------- ---------
Total Loans & Leases, net 277,289 289,886
--------- ---------
Bank premises and equipment 7,931 7,304
Accrued interest 2,427 2,681
Other real estate owned, net of allowance
for possible losses of $897 in 1997
and $1,146 in 1996 4,527 4,595
Cash surrender value of life insurance 3,659 3,596
Prepaid expenses 723 967
Deferred income taxes 1,954 1,954
Other assets 1,418 1,940
--------- ---------
TOTAL ASSETS $ 417,867 $ 410,505
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Deposits
Demand deposits $ 115,626 $ 108,670
Savings and NOW deposits 90,169 84,781
Money market deposits 60,627 59,099
Time deposits in denominations of
$100,000 or more 50,806 58,547
Other time deposits 60,188 59,869
--------- ---------
Total deposits 377,416 370,966
Accrued employee benefits 1,419 1,417
Accrued interest and other liabilities 1,373 1,732
Long-term debt 157 168
--------- ---------
Total Liabilities 380,365 374,283
--------- ---------
Stockholders' Equity
Contributed capital
Capital stock-authorized 12,500,000
shares without par value; issued and
outstanding 4,548,898 shares in 1997
and 4,520,590 in 1996 15,647 15,406
Additional Paid-in Capital 592 592
Retained Earnings 21,740 20,607
Valuation Allowance for Investments (477) (383)
--------- ---------
Total Stockholders' Equity 37,502 36,222
--------- ---------
Total Liabilities and
Stockholders' Equity $ 417,867 $ 410,505
========= =========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
Three Months Ended March 31,
1997 1996
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 7,326 $ 7,622
Interest on investment securities
U.S. Treasury 112 60
Obligations of other U.S. government
agencies 420 447
Municipal agencies 101 106
Other securities 46 52
Interest on deposits 40 111
Interest on Federal funds sold 279 334
Lease financing income 44 32
-------- --------
Total Interest Income 8,368 8,764
-------- --------
INTEREST EXPENSE
Interest on savings & NOW deposits 323 298
Interest on money market deposits 525 394
Interest on time deposits in denominations
of $100,000 or more 836 929
Interest on other time deposits 755 1,015
Interest on borrowings 4 5
-------- --------
Total Interest Expense 2,443 2,641
-------- --------
Net Interest Income 5,925 6,123
PROVISION FOR LOAN AND LEASE LOSSES 281 490
-------- --------
Net Interest Income After Provisions
for Loan and Lease Losses 5,644 5,633
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
OTHER INCOME
Fees and service charges 1,271 1,180
Gain on sale SBA loans 13 -
Other 97 66
-------- --------
Total other income 1,381 1,246
-------- --------
OTHER EXPENSES
Salaries and benefits 2,477 2,505
Occupancy expenses, net of revenue
of $28 in 1997 and $117 in 1996 531 508
Furniture and equipment expenses 473 343
Other expenses (Note 2) 1,744 2,197
-------- --------
Total other expenses 5,225 5,553
-------- --------
INCOME BEFORE INCOME TAXES 1,800 1,326
-------- --------
PROVISION FOR INCOME TAXES 667 503
-------- --------
NET INCOME $ 1,133 $ 823
======== ========
EARNINGS PER SHARE OF COMMON STOCK $ 0.23 $ 0.17
(Note 3) ======== ========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
VALUATION
NUMBER OF ADDITIONAL ALLOWANCE
SHARES CAPITAL PAID-IN RETAINED FOR
OUTSTANDING STOCK CAPITAL EARNINGS INVESTMENT TOTAL
----------- -------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 3,955,761 $ 10,789 $ 456 $ 19,999 $ (202) $ 31,042
10% stock dividend
distributed 4/5/96 3,572 (3,572) -
Common stock issued under
employee benefit and dividend
reinvestment plans 17,666 151 151
Net income for three months 823 823
Net unrealized loss on
marketable equity securities
available-for-sale (87) (87)
Change in net unrealized
loss on securities
available for sale (146) (146)
----------- -------- --------- --------- -------- ----------
BALANCE, March 31, 1996 3,973,427 $ 14,512 $ 456 $ 17,250 $ (435) $ 31,783
=========== ======== ========= ========= ======== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 4,520,590 $ 15,406 $ 592 $ 20,607 $ (383) $ 36,222
Exercise of stock options 16,813 100 100
Common stock issued under
employee benefit and
dividend reinvestment plans 11,495 141 141
Net income for three months 1,133 1,133
Net unrealized loss on
marketable equity
securities available-for-sale (53) (53)
Change in net unrealized
loss on securities available
for sale (41) (41)
----------- -------- --------- -------- ---------- ----------
BALANCE, March 31, 1997 4,548,898 $ 15,647 $ 592 $ 21,740 $ (477) $ 37,502
=========== ======== ========= ======== ========== ==========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1997 1996
Cash Flows From Operating Activities:
Interest and fees received $ 8,482 $ 9,113
Service fees and other income received 1,305 1,188
Financing revenue received under leases 44 31
Interest paid (2,626) (2,821)
Cash paid to suppliers and employees (7,656) (5,375)
Income taxes paid (291) (236)
---------- ----------
Net Cash Provided(Used) by Operating Activities (742) 1,900
---------- ----------
Cash Flows From Investing Activities:
Proceeds from maturity of investment
securities 33,243 60,320
Purchase of investment securities (47,412) (75,681)
Proceeds from maturity of deposits in
other financial institutions 2,174 -
Purchase of deposits in other financial
institutions (295) (2,763)
Net (increase) decrease in credit card and
revolving credit receivables 32 101
Recoveries on loans previously written off 54 67
Net (increase) decrease in loans 13,086 (5,843)
Net (increase) decrease in leases (1,445) 161
Capital expenditures 2,031 (1,171)
Proceeds from sal of other real estate owned 656 -
Proceeds from sale of property, plant
and equipment 13 6
---------- ----------
Net Cash Provided(Used) in Investing Activities 2,137 (24,803)
---------- ----------
Cash Flows From Financing Activities:
Net increase (decrease) in demand deposits,
NOW accounts, savings accounts, and money
market deposits 13,926 12,516
Net increase (decrease) in certificates of
deposit with maturities of three months or less (13,281) 68
Net increase (decrease) in certificates of
deposit with maturities of more than three
months 5,859 (4,994)
Proceeds from stock issued under employee
benefit and dividend reinvestment plans 241 152
Principal payment on long term debt (11) (10)
Dividends paid (40) -
---------- ----------
Net Cash Provided by Financing Activities 6,694 7,732
---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents 8,089 (15,171)
Cash and Cash Equivalents at Beginning of Year 48,573 68,028
---------- ----------
Cash and Cash Equivalents
at March 31, 1997 & 1996 $ 56,662 $ 52,857
========== ==========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
1997 1996
<S> <C> <C>
Net Income $ 1,133 $ 823
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization (2,658) 262
Provision for possible credit losses 281 490
(Gain) loss on disposition of property,
plant & equipment (13) 7
(Increase) decrease in taxes payable 376 267
(Increase) decrease in other assets 522 355
Increase (decrease) in interest receivable 254 381
(Increase) decrease in discounts and premiums (96) -
(Increase) decrease in interest payable (183) (180)
Increase (decrease) in fees and other
receivables 244 (66)
(Increase) decrease in accrued expenses
and other liabilities (526) (373)
Increase in cash surrender value of life
insurance (63) (66)
Gain on sale of investments and other assets (13) -
---------- ---------
Total Adjustments (1,875) 1,077
---------- ---------
Net Cash Provided(Used) by Operating Activities $ (742) $ 1,900
========== =========
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
</TABLE>
<PAGE>
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
MARCH 31, 1997 AND 1996
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
statement of the results for the interim periods presented have been included.
For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K the year ended
December 31, 1996. The results of operations for the three month period ended
March 31, 1997 are not necessarily indicative of the results to be expected
for the full year.
<PAGE>
<TABLE>
<CAPTION>
NOTE #2 - OTHER EXPENSES
The following is a breakdown of other expenses for the three month
periods ended March 31, 1997 and 1996.
Three Months Ended March 31,
1997 1996
<S> <C> <C>
Data processing $ 232 $ 217
Marketing expenses 165 217
Office supplies, postage
and telephone 310 283
Bank Insurance 108 116
FDIC Assessments 43 34
Legal Fees 365 215
Litigation Settlement Costs - 453
Provision for OREO loss 25 90
Other expenses 496 572
------- -------
Total Other Expenses $ 1,744 $ 2,197
======= =======
</TABLE>
<PAGE>
NOTE #3 - EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
outstanding during each period. Stock options have been excluded from the
computation of earning per share, as their effect is immaterial.
The weighted average number of shares used to compute earnings per share was
4,983,166 in 1997 and 4,796,980 in 1996. The weighted average number of shares
has been adjusted for the 10% stock dividends in 1996 and 1997.
NOTE #4 - INCOME TAXES
The Bank adopted Statement No. 109 of the Financial Accounting Standard Board,
Accounting for Income Taxes, commencing January 1, 1993. This new statement
supersedes Statement No. 96 and among other things, changes the criteria for
the recognition and measurement of deferred tax assets. This adoption does not
create a material change in the financial statements of the Bank or the
Company.
NOTE #5 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement 107 is effective for financial
statements for fiscal years ended after December 15, 1992. The Statement
considers the fair value of financial instruments for both assets and
liabilities.
The following methods and assumptions were used to estimate the fair value of
financial instruments.
Investment Securities
For U.S. Government and U.S. Agency securities, fair values are based on market
prices. For other investment securities, fair value equals quoted market price
if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities as the basis for a
pricing matrix.
Loans
The fair value for loans with variable interest rates is the carrying amount.
The fair value of fixed rate loans is derived by calculating the discounted
value of the future cash flows expected to be received by the various
homogeneous categories of loans. All loans have been adjusted to reflect
changes in credit risk.
Deposits
The fair value of demand deposits, savings deposits, savings accounts and NOW
accounts is defined as the amounts payable on demand at March 31, 1997.
The fair value of fixed maturity certificates of deposit is estimated based on
the discounted value of the future cash flows expected to be paid on the
deposits.
Notes Payable
Rates currently available to the Bank for debt with similar terms and remaining
maturities are used to estimate the fair value of existing debt.
Commitments to Extend Credit and Standby Letter of Credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the parties involved. For
fixed-rate loan commitments, fair value also considered the difference between
current levels of interest rates and committed rates.
The fair value of guarantees and letters of credit are based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with parties involved at March 31, 1997.
The estimated fair value of the Bank's financial instruments are as follows:
MARCH 31, 1997
Carrying Amount Fair Value
--------------- --------------
Financial Assets (dollars in thousands)
Cash 58,740 58,740
Investment securities 59,199 59,146
Real estate loans 21,852 21,652
Installment loans 13,043 13,040
Commercial loans 243,661 243,726
Direct lease financing 4,227 4,216
Financial Liabilities
Deposits 377,416 368,705
Long term debt 157 157
Unrecognized Financial Instruments
Commitments to extend credit 34,748 34,748
Standby letters of credit 527 527
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The Company's principal operating subsidiary is Foothill Independent Bank,
a California state chartered bank (the "Bank"), which accounts for
substantially all of the Company's revenues and income. Accordingly, the
following discussion focuses primarily on the operations and financial
condition of the Bank.
Net Interest Income. Net interest income is a principal determinant of a
bank's income. Net interest income represents the difference or "spread"
between the interest earned on interest-earning assets, such as loans and
investment securities, and the interest paid on interest-bearing liabilities,
principally deposits. Net interest income declined by $198,000, or 3.2%, in
the quarter ended March 31, 1997, as compared to the same quarter of 1996,
primarily as a result of a $396,000, or 4.5%, decline in interest income,
which more than offset a $198,000, or 7.5%, decline in interest expense.
The decline in interest income was primarily due to a decline in yields on
outstanding loans as a result of declining market rates of interest during the
first quarter of 1997. The decline in interest expense was due primarily to a
reduction in the volume of time certificates of deposit ("TCDs" or "Time
Deposits"), both in denominations of $100,000 or more and in
denominations of less that $100,000, and, to a lesser extent, a decline in
market rates of interest.
A bank's net interest income is affected by a number of factors including
the relative percentages or the "mix" of (i) the Bank's assets, between loans,
on the one hand, on which the Bank is able to obtain higher rates of interest,
and investment securities, federal funds sold and funds held in interest-
bearing deposits with other financial institutions, on the other hand, on
which the Bank is able to obtain somewhat lower rates of interest; (ii)
variable and fixed rate loans in its loan portfolio and (iii) demand and
savings deposits, on the one hand, and Time Deposits, on the other hand.
As a general rule, a bank with a relatively high percentage of fixed-rate
loans will experience a decline in interest income during a period of
increasing market rates of interest, because it will be unable to "reprice" its
fixed rate loans to offset fully 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 TCD's cannot be
implemented until they mature, at which time a bank can seek their renewal
at lower rates of interest or allow such deposits to terminate or "run-off" in
order to reduce interest expense.
The Bank attempts to reduce its exposure to interest rate fluctuations, and
thereby at least to maintain and, if possible, to increase its net interest
margin or spread by seeking (i) to attract and maintain a significant volume
of demand and savings deposits that are not as sensitive to interest rate
fluctuations as are TCD's, and (ii) to match opportunities to "reprice"
earning assets, particularly loans, in response to changes in market rates of
interest which require or cause repricing of deposits. Beginning in the
second half of 1996 and continuing into the first quarter of 1997, the Bank's
management elected to allow maturing TCD's to "run-off" and commenced
marketing programs designed to attract additional demand and savings
deposits. As a result of these efforts the average volume of demand and
savings (including money market) deposits increased by $31,614,000, or
14.1% in quarter ended March 31, 1997 compared to the same period in
1996 and, at March 31, 1997, such deposits represented 69% of the Bank's
total deposits as compared to 62% at March 31, 1996. During the quarter
ended March 31, 1997, the average volume of TCDs in denominations of
$100,000 or more was reduced to by $ 4,287,000 or 7.0%. The change in
the mix of deposits and lower rates paid on interest bearing deposits
contributed to an improvement in the Bank's net interest margin (i.e., net
interest income stated as a percentage of interest income) in the quarter
ended March 31, 1997 to 70.8% from 69.9% in the same quarter of 1996.
The ability of the Bank to maintain its net interest margin is not entirely
within its control because the interest rates the Bank is able to charge on
loans and the interest rates it must offer to maintain and attract deposits are
affected by national monetary policies established and implemented by the
Federal Reserve Board and by competitive conditions in the Bank's service
areas. In addition, the effect on a bank's net interest margins of changes in
market rates of interest will depend on the types and maturities of its
deposits and earning assets. For example, a change in interest rates paid on
deposits in response to changes in market rates of interest can be
implemented more quickly in the case of savings deposits and money
market accounts than with respect to Time Deposits as to which a change in
interest rates generally cannot be implemented until such deposits mature.
In addition, a change in rates of interest paid on deposits can and often does
lead consumers to move their deposits from one type of deposit to another
or to shift funds from deposits to non-bank investments or from such
investments to bank deposit accounts or instruments, which also will affect
a bank's net interest margin.
Provision for Loan and Lease Losses. The Bank follows the practice of
maintaining a reserve for possible losses on loans and leases that occur
from time to time as an incidental part of the banking business. Write-offs
of loans (essentially reductions in the carrying values of non-performing
loans due to possible losses on their ultimate recovery) are charged against
this reserve (the "Loan Loss Reserve"), which is adjusted periodically to
reflect changes in (i) the volume of outstanding loans and (ii) the risk of
potential losses due to a deterioration in the condition of borrowers or in the
value of property securing non-performing loans or changes in general
economic conditions. Additions to the Loan Loss Reserve are made
through a charge against income referred to as the "provision for loan and
lease losses." During the first quarter of 1997, the Bank was able to dispose
of certain non-performing loans which enabled the Bank to reduce the
provision in the first quarter of 1997 to $281,000, from $490,000 in the
same quarter of 1996, without adversely affecting the ratio of the Bank's
Loan Loss Reserve to total loans and leases outstanding at March 31, 1997,
which was unchanged, at approximately 1.6%, from the ratio at March 31,
1996. Net loan charge-offs for the first three months of 1997 aggregated
$398,000, representing nine hundredths of one percent (0.09%) of average
loans and leases, as compared to net loan charge-offs for the same period in
1996 of $221,000, which represented eight hundredths of one percent
(0.08%) of average loans and leases outstanding.
Other Income. Other income increased by $135,000 or 10.8% in the first
three months of 1997 compared to 1996, primarily as a result of increases in
transaction fees and service charges that were attributable to increases in the
volume of total deposits and other banking transactions.
Other Expense. Other expense (which is also referred to as "non-interest
expense"), consists primarily of (i) salaries and other employee expenses,
(ii) occupancy and furniture and equipment expenses, and (iii) other
operating and miscellaneous expenses that include insurance premiums,
marketing expenses, data processing costs and charges that are periodically
made against income to establish reserves for possible losses on the
disposition of real properties acquired on or in lieu of foreclosure of
defaulted loans (commonly referred to as "other real estate owned" or
"OREO"). Non-interest expense was approximately $327,000, or 5.9%,
lower in the first quarter of 1997, than in the first quarter of 1996, due
primarily to a non-recurring charge, resulting from the Bank's settlement of
certain litigation, in the first quarter of 1996. This reduction was partially
offset by increases in professional and equipment expenses related to a
conversion by the Bank to a new data processing system during the first
quarter of 1997 that occurred on April 14, 1997. As a result of the reduction
in non-interest expense, as a percentage of operating income (net interest
income plus other income), such expense declined from 75.4% in the first
quarter of 1996 to 71.5% in same period of 1997.
Income Taxes. Income taxes increased by approximately $164,000 or
32.6% during the first quarter of 1997 compared to 1996, primarily as a
result of the increase in pre-tax income achieved in 1997.
FINANCIAL CONDITION AND LIQUIDITY
The Company's total assets at March 31, 1997 were approximately
$7,362,000 or 1.8% higher than at December 31, 1996. Average total assets
during that same three month period, from December 31, 1996 to March 31,
1997, increased by $11,752,000 or 2.9%, due primarily to an increase in the
average volume of loans and leases and, to a lesser extent, an increase in the
average volume of investment securities.
Average loans and leases increased approximately $8,474,000 or 3.0% in
the three month period ended March 31, 1997. The average amount of
investment securities held by the Bank during the first three months of 1997
increased by approximately $677,000 or 1.0% compared to year end
December 31, 1996 figures. The average volume of interest bearing
deposits held at other financial institutions declined by 60% to $2,965,000
in the first quarter of 1997 from $7,391,000 at December 31, 1996. The
average volume of Federal Funds sold increased 9% from $20,033,000 at
December 31, 1996 compared to $21,835,000 in the first quarter of 1997.
Beginning in the first quarter of 1996 and continuing into 1997, the Bank
initiated new marketing programs designed to increase the volume of
demand, savings and money market deposits, which are either non-interest
bearing or bear interest at rates which are substantially lower than those paid
on Time Deposits. At the same time, management began reducing the
interest rates it offered on TCDs in denominations of $100,000 or more, as
well as on other Time Deposits, to discourage renewals of existing and
purchases of new Time Deposits by customers and, thereby, reduce the
volume of those deposits at the Bank. As a result, at March 31, 1997, the
volume of demand deposits and savings deposits at the Bank was
$13,872,000 higher than at December 31, 1996 and non-interest bearing
demand deposits, as a percentage of total deposits, had increased to 30.6%
from 29.2% at December 31, 1996. By contrast the volume of Time
Deposits, including TCD's in excess of $100,000, outstanding at March 31,
1997, was $7,741,000, or 13%, lower than at December 31, 1996.
Capital Resources. During 1995, the Board of Directors made the decision
to discontinue the payment of cash dividends in order to retain internally
generated funds to support further growth of the Bank. In addition to the
two new offices opened during 1995, the Bank opened its eleventh office, in
Chino Hills, California on March 25, 1996. On April 9, 1997, the Company
declared its third 10% stock dividend in three years to shareholders of
record on June 6, 1997. This dividend will be distributed on June 20, 1997
and will be accounted for by a $6,165,000 reduction in retained earnings
and a corresponding $6,165,000 increase in stated capital of the Company.
As a result of the increased earnings in the first quarter of 1997 and the
retention of internally generated funds, the Company's total shareholders'
equity increased by approximately $1,280,000 or 3.5% to $37,502,000 at
March 31, 1997 from $36,222,000 at December 31, 1996. As a result, the
Bank's Tier 1 capital ratio increased to 8.9% at March 31, 1997 compared
to 8.5% at December 31, 1996, and as of those same respective dates, the
Bank's Tier 1 risk-based capital ratios were 13.3% and 12.3%, respectively.
The risk-based capital ratio is determined by weighting the bank's assets in
accordance with certain risk factors and, the higher the risk profile of a
bank's assets, the greater is the amount of capital that is required to
maintain an adequate risk-based capital ratio, which generally is at least 8%.
The Bank's Tier 1 capital and Tier 1 risk-based capital ratios compare
favorably with other peer group banks.
Under accounting principles, that became applicable to the Company in
1994, which address the financial reporting requirements for investments in
certain equity and debt securities held by financial institutions, the
Company is required to report the unrealized gain or loss on securities that
are held for sale and certain other equity securities. Since any such gains or
losses are unrealized, and any actual gain or loss will not be determined
unless and until there is a sale or other disposition of the securities, any
unrealized gain is required to be credited to, and any unrealized losses are
required to be charged against, stockholders' equity, rather than being
reflected as income or loss for income statement purposes. At March 31,
1997, the Company recorded a valuation reserve for unrealized losses on
such securities aggregating approximately $476,000. Of this amount,
$407,000 related to certain investments in mutual funds, which are
classified as investments in marketable equity securities, and which the
Company has held for several years and intends to continue to hold for the
foreseeable future.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Adoption of Shareholders Rights Plan. On February 25, 1997, the
Board of Directors of the Company approved and adopted a Shareholders
Rights Plan ( the "Rights Plan"), which is set forth in a Rights Agreement
dated as of February 25, 1997 (the "Rights Agreement") between the
Company and ChaseMellon Shareholder Services, L.L.C. (the "Rights
Agent") and, pursuant to the Rights Plan declared a dividend of one (1)
right (a "Right") to purchase one share of the Company's Common Stock
and, under certain circumstances, other securities, for each outstanding
share of Common Stock of the Company held by shareholders of record as
of March 18, 1997. As more fully set forth in the Rights Agreement, unless
and until (i) there is a public announcement that any person, or group of
persons, has acquired beneficial ownership of 15% or more of the
outstanding shares of the Company's Common Stock, or (ii) a tender offer
or exchange offer is commenced to acquire 15% or more of the outstanding
shares of the Company's Common Stock, none of the Rights will be
distributed to, or will be exercisable by, the Shareholders and all of the
Rights will be represented by the certificates evidencing the outstanding
shares of Common Stock of the Company.
The Rights are designed to protect and maximize the value of the
shareholders' interest in the Company in the event of an unsolicited
takeover attempt that has not been approved by the Company's Board of
Directors. However, the Rights are not intended to prevent an acquisition or
takeover of the Company and the Rights are redeemable by action of the
Board of Directors in connection with any proposed acquisition or takeover
of the Company that is approved by the Board of Directors of the Company.
The foregoing description of the Rights Plan and the Rights is
qualified in its entirety by reference to, and there is incorporated into this
Report by this reference, the Rights Agreement, attached as Exhibit 1 to the
Company's Registration Statement on Form 8-A dated as of February 27,
1997 and filed with the Securities and Exchange Commission on March 3,
1997 under the Securities Exchange Act of 1934, as amended, which Rights
Agreement includes (i) as Exhibit A thereto, the Form of Rights Certificate
that would evidence the Right in the event of the distribution thereof, and
(ii) as Exhibit B thereto, a Summary of Terms of the Shareholders Rights
Plan.
ITEM 6, EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
27. Financial Data Schedule
(B) Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 1997 FOOTHILL INDEPENDENT BANCORP
By: \s\ CAROL ANN GRAF
CAROL ANN GRAF
Senior Vice President
Chief Financial Officer
Assistant Secretary
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered Page
Exhibit 27. Financial Data Schedule 17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF MARCH 31, 1997 AND THE STATEMENT OF INCOME FOR
THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
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