<PAGE> 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 September 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission file number 0-11337
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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)
(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 XX . 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.
5,092,693 shares of Common Stock
as of October 31, 1997
Page 1 of 17 Pages
Exhibit Index on sequentially numbered Page 16
<PAGE> 2
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
September December 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS Cash and due from banks $ 35,891 $ 33,673
Federal funds sold 24,550 14,900
--------- ---------
Total Cash and Cash Equivalents 60,441 48,573
--------- ---------
Interest-bearing deposits in other financial institutions 5,935 3,957
--------- ---------
Investment Securities Held-To-Maturity (approximate market
value $19,506 in 1997 and $5,588 in 1996
U.S. Treasury 13,384 2,796
U.S. Government Agencies 3,988
Municipal Agencies 2,077 2,529
Other Securities 250 250
--------- ---------
Total Investment Securities Held-To-Maturity 19,699 5,575
--------- ---------
Investment Securities Available-For-Sale 33,826 39,477
--------- ---------
Loans, net of unearned discount and
prepaid points and fees 283,961 291,766
Direct lease financing 5,065 2,864
Less reserve for possible loan and lease losses (3,942) (4,744)
--------- ---------
Total Loans & Leases, net 285,084 289,886
--------- ---------
Bank premises and equipment 7,842 7,304
Accrued interest 2,613 2,681
Other real estate owned, net of allowance for possible losses
of $1,132 in 1997 and $1,146 in 1996 4,899 4,595
Cash surrender value of life insurance 3,846 3,596
Prepaid expenses 866 967
Deferred income taxes 2,018 1,954
Other assets 249 1,940
--------- ---------
TOTAL ASSETS $ 427,318 $ 410,505
========= =========
LIABILITIES AND Deposits
STOCKHOLDERS' Demand deposits $ 122,236 $ 108,670
EQUITY Savings and NOW deposits 88,571 84,781
Money market deposits 64,028 59,099
Time deposits in denominations of $100,000 or more 47,644 58,547
Other time deposits 60,540 59,869
--------- ---------
Total deposits 383,019 370,966
--------- ---------
Accrued employee benefits 1,546 1,417
Accrued interest and other liabilities 1,901 1,732
Long-term debt 135 168
--------- ---------
Total Liabilities 386,601 374,283
--------- ---------
Stockholders' Equity
Contributed capital
Capital stock - authorized 12,500,000 shares
without par value; issued and outstanding
5,086,836 shares
in 1997 and 4,520,590 in 1996 22,432 15,406
Additional Paid-in Capital 592 592
Retained Earnings 18,013 20,607
Valuation Allowance for Investments (320) (383)
--------- ---------
Total Stockholders' Equity 40,717 36,222
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 427,318 $ 410,505
========= =========
</TABLE>
See accompanying notes to financial statements
Page 2 of 17 pages
<PAGE> 3
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------ --------------------------------
1997 1996 1997 1996
------- ------- ------ ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $22,445 $23,087 $7,647 $8,101
Interest on investment securities
U.S. Treasury 688 172 307 64
Obligations of other U.S. government
agencies 1,192 1,415 371 340
Municipal agencies 286 326 94 110
Other securities 150 146 47 44
Interest on deposits 147 336 66 107
Interest on Federal funds sold 926 772 309 277
Lease financing income 182 93 75 33
------- ------- ------ ------
Total Interest Income 26,016 26,347 8,916 9,076
------- ------- ------ ------
INTEREST EXPENSE
Interest on savings & NOW deposits 980 942 337 329
Interest on money market deposits 1,681 1,285 606 494
Interest on time deposits in denominations
of $100,000 or more 2,253 2,453 710 734
Interest on other time deposits 2,343 2,680 785 767
Interest on borrowings 12 15 4 5
------- ------- ------ ------
Total Interest Expense 7,269 7,375 2,442 2,329
------- ------- ------ ------
Net Interest Income 18,747 18,972 6,474 6,747
PROVISION FOR LOAN AND LEASE LOSSES 381 1,747 50 722
------- ------- ------ ------
Net Interest Income After Provisions
for Loan and Lease Losses 18,366 17,225 6,424 6,025
------- ------- ------ ------
OTHER INCOME
Fees and service charges 3,903 3,590 1,274 1,225
Gain on sale SBA loans 110 -- 95
Other 196 316 27 127
------- ------- ------ ------
Total other income 4,209 3,906 1,396 1,352
------- ------- ------ ------
OTHER EXPENSES
Salaries and benefits 7,795 8,026 2,697 2,906
Occupancy expenses, net of revenue
of $97 in 1997 and $87 in 1996 1,587 1,555 528 553
Furniture and equipment expenses 1,331 1,083 410 359
Other expenses (Note 2) 6,293 5,692 2,040 1,661
------- ------- ------ ------
Total Other Expenses 17,006 16,356 5,675 5,479
------- ------- ------ ------
INCOME BEFORE INCOME TAXES 5,569 4,775 2,145 1,898
------- ------- ------ ------
PROVISION FOR INCOME TAXES 2,100 1,847 823 746
------- ------- ------ ------
NET INCOME $ 3,469 $ 2,928 $1,322 $1,152
======= ======= ====== ======
EARNINGS PER SHARE OF COMMON STOCK $ 0.69 $ 0.61 $ 0.26 $ 0.24
======= ======= ====== ======
</TABLE>
See accompanying notes to financial statements
Page 3 of 17 pages
<PAGE> 4
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
VALUATION
NUMBER OF ADDITIONAL ALLOWANCE
SHARES CAPITAL PAID-IN RETAINED FOR
OUTSTANDING STOCK CAPITAL EARNINGS INVESTMENTS 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 4/5/96 396,840 3,571 (3,571) --
Fractional shares of stock
dividend paid in cash (4) (4)
Exercise of stock options 39,660 238 238
Common stock issued under
employee benefit and dividend
reinvestment plans 31,747 273 273
Net income for nine months 2,928 2,928
Net unrealized loss on marketable
equity securities available-for-sale (121) (121)
Change in net unrealized loss
on securities available-for-sale (118) (118)
---------- -------- ------- ------- ----- -------
BALANCE, September 30, 1996 4,424,008 $ 14,871 $ 456 $19,352 $(441) $34,238
========== ======== ======= ======= ===== =======
BALANCE, January 1, 1997 4,520,590 15,406 592 20,607 (383) 36,222
10% stock dividend
distributed 6/20/97 457,167 6,058 (6,058) --
Fractional shares of stock
dividend paid to Bancorp (5) (5)
Exercise of stock options 67,056 416 416
Common stock issued under
employee benefit and dividend
reinvestment plans 42,023 552 552
Net income for nine months 3,469 3,469
Net unrealized loss on marketable
equity securities available-for-sale 10 10
Change in net unrealized loss
on securities available-for-sale 53 53
---------- -------- ------- ------- ----- -------
BALANCE, September 30, 1997 5,086,836 $ 22,432 $ 592 $18,013 $(320) $40,717
========== ======== ======= ======= ===== =======
</TABLE>
Page 4 of 17 pages
<PAGE> 5
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED SEPTEMBER, 1997 AND 1996
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1997 1996
-------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Interest and fees received $ 25,950 $ 26,696
Service fees and other income received 3,897 3,551
Financing revenue received under leases 182 93
Interest paid (7,534) (7,782)
Cash paid to suppliers and employees (17,332) (15,151)
Income taxes paid (1,606) (1,850)
-------- ---------
Net Cash Provided (Used) by Operating Activities 3,557 5,557
-------- ---------
Cash Flows From Investing Activities:
Proceeds from maturity of investment securities 82,078 159,726
Purchase of investment securities (90,507) (151,120)
Proceeds from maturity of deposits in
other financial institutions (4,647) 3,958
Purchase of deposits in other financial
institutions 2,669 (3,352)
Net (increase) decrease in credit card and
revolving credit receivables (255) 62
Recoveries on loans previously written off 306 372
Net (increase) decrease in loans 6,266 (34,252)
Net (increase) decrease in leases (2,201) (478)
Capital expenditures 1,533 (2,108)
Proceeds from sale of property, plant and equipment 62 58
-------- ---------
Net Cash Provided (Used) in Investing Activities (4,696) (27,134)
-------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in demand deposits, NOW accounts,
savings accounts, and money market deposits 22,304 34,722
Net increase (decrease) in certificates of deposit
with maturities of three months or less 6,167 (26,545)
Net increase (decrease) in certificates of deposit
with maturities of more than three months (16,394) (372)
Proceeds from exercise of stock options 416 238
Proceeds from stock issued under employee benefit and
dividend reinvestment plans 552 273
Principal payment on long term debt (33) (29)
Dividends paid (5) (4)
-------- ---------
Net Cash Provided by Financing Activities 13,007 8,283
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 11,868 (13,294)
---------
Cash and Cash Equivalents at Beginning of Year 48,573 68,028
-------- ---------
Cash and Cash Equivalents at September 30, 1997 & 1996 $ 60,441 $ 54,734
======== =========
</TABLE>
Page 5 of 17 pages
<PAGE> 6
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net Income $ 3,469 $ 2,928
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization (2,071) 797
Provision for possible credit losses 381 1,747
(Gain) loss on disposition of property, plant & equipment (62) (37)
Provision for deferred taxes (64) --
(Increase) decrease in taxes payable 558 (3)
(Increase) decrease in other assets 1,691 (285)
Increase (decrease) in interest receivable 68 442
(Increase) decrease in discounts and premiums 48 --
(Increase) decrease in interest payable (265) (407)
Increase (decrease) in fees and other receivables 101 (318)
(Increase) decrease in accrued expenses and other
liabilities 63 775
Increase in cash surrender value of life insurance (250) --
Gain on sale of investments and other assets (110) (82)
------- -------
Total Adjustments 88 2,629
------- -------
Net Cash Provided (Used) by Operating Activities $ 3,557 $ 5,557
======= =======
</TABLE>
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 17 pages
<PAGE> 7
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
SEPTEMBER 30, 1997 AND 1996
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
statement of the results for the interim periods presented have been included.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996. The results of operations for the nine month period ended September
30, 1997 are not necessarily indicative of the results to be expected for the
full year.
NOTE #2 - OTHER EXPENSES
The following is a breakdown of other expenses for three and nine month periods
ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------ -------------------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Data processing $ 829 $ 662 $ 243 $ 212
Marketing expenses 495 583 166 212
Office supplies, postage
and telephone 1,053 771 342 234
Bank Insurance 362 335 110 92
FDIC Assessments 110 101 38 50
Legal Fees 688 346 228 110
Provision for OREO Loss 260 195 80 25
Other expenses 2,496 2,699 833 726
------ ------ ------ ------
Total Other Expenses $6,293 $5,692 $2,040 $1,661
====== ====== ====== ======
</TABLE>
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 earnings per share, as their effect is immaterial.
The weighted average number of shares used to compute earnings per share was
5,020,624 in 1997 and 4,842,645 in 1996. The weighted average number of shares
for 1996 has been adjusted for the 10% stock dividends in 1996 and 1997.
Page 7 of 17 pages
<PAGE> 8
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 September 30, 1997. The
fair value of fixed maturity certificates of deposit is estimated based on the
discounted value of the future cash flows expected to be paid on the deposits.
Notes Payable
Rates currently available to the Bank for debt with similar terms and remaining
maturities are used to estimate the fair value of existing debt.
Page 8 of 17 pages
<PAGE> 9
Notes to Condensed Consolidated Financial Statements (continued)
Note #5 - Disclosures about Fair Value of Financial Instruments (Continued)
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 September 30, 1997.
The estimated fair value of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
September 30, 1997
Carrying Amount Fair Value
(dollars in thousands)
<S> <C> <C>
Financial Assets
Cash $ 66,376 $ 66,376
Investment securities 53,525 53,332
Real estate loans 27,059 27,535
Installment loans 6,387 6,845
Commercial loans 246,701 242,842
Direct lease financing 4,960 4,445
Financial Liabilities
Deposits 383,019 379,160
Long term debt 135 135
Unrecognized Financial Instruments
Commitments to extend credit 45,868 45,868
Standby letters of credit 527 527
</TABLE>
Page 9 of 17 pages
<PAGE> 10
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.
RESULTS OF OPERATIONS
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. During
the nine months and quarter ended September 30, 1997, net interest income
declined by $225,000, or 1.2%, and $273,000, or 4.2%, respectively, as compared
to the respective corresponding periods of 1996. In the nine months ended
September 30, 1997, the decline was due to a decrease in interest income of
$331,000, or 1.2%, that was partially offset by a $106,000, or 1.4%, decrease in
interest expense. In the quarter ended September 30, 1997, the decline in
interest income was attributable to a $160,000 or 1.8% decrease in interest
income and a $113,000 or 4.8% increase in interest expense.
The decreases in interest income were primarily due to a decline in
yields on outstanding loans as a result of declining market rates of interest
during 1997. The decline in interest expense in the nine months ended September
30, 1997 was due primarily to a reduction in the volume of time certificates of
deposit ("TCDs" or "Time Deposits") that occurred during the first six months of
1997, and, to a lesser extent, a decline in market rates of interest. During the
quarter ended September 30, 1997, on the other hand, the average volume of
interest bearing deposits, including Time Deposits in denominations under
$100,000, increased by approximately 3%, which caused interest expense to
increase as compared to the same quarter of 1996.
A bank's net interest income is affected by a number of factors
including the relative percentages or the "mix" of (i) the Bank's assets,
between loans, on the one hand, on which the Bank is able to obtain higher rates
of interest, and investment securities, federal funds sold and funds held in
interest-bearing deposits with other financial institutions, on the other hand,
on which the Bank is able to obtain somewhat lower rates of interest; (ii)
variable and fixed rate loans in its loan portfolio and (iii) demand and savings
deposits, on the one hand, and Time Deposits, on the other hand. As a general
rule, a bank with a relatively high percentage of fixed-rate loans will
experience a decline in interest income during a period of increasing market
rates of interest, because it will be unable to "reprice" its fixed rate loans
to fully offset the increase in the rates of interest it must offer to retain
maturing Time Deposits and attract new Time Deposits. Similarly, a bank with a
relatively high percentage of Time Deposits generally will experience greater
increases in interest expense 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 rate loans will, as a general rule, experience a decline
in net interest income because such loans usually contain automatic repricing
provisions that are "triggered" by declines in market rates of interest; whereas
offsetting reductions in the rates of interest paid on TCDs cannot be
implemented until they mature, at which time a bank can seek their renewal at
lower rates of interest or allow such deposits to terminate or "run-off" in
order to reduce interest expense.
10
<PAGE> 11
The Bank attempts to reduce its exposure to interest rate fluctuations,
and thereby at least to maintain and, if possible, to increase its net interest
margin or "spread" by seeking (i) to attract and maintain a significant volume
of demand and savings deposits that are not as sensitive to interest rate
fluctuations as are TCD's, and (ii) to match opportunities to "reprice" earning
assets, particularly loans, in response to changes in market rates of interest
which require or cause repricing of deposits. Beginning in the second half of
1996 and continuing through the first half of 1997, the Bank's management
elected to allow maturing TCD's to "run-off" and commenced marketing programs
designed to attract additional demand and savings deposits. These actions led to
an increase, during the nine months ended September 30, 1997, in the average
volume of demand and savings (including money market) deposits of $27,570,000,
or 11.6%, compared to the same period of 1996 and, at September 30, 1997, such
deposits represented 70.3% of the Bank's average volume of total deposits as
compared to 65.8% at September 30, 1996. As a result, the Bank was able to
maintain its net interest margin (i.e., net interest income stated as a
percentage of interest income) at approximately 72% for the nine months ended
September 30, 1997, which was unchanged from the net interest margin for same
nine months of 1996. However, due to the combined effect of the decrease in
interest income and the increase in interest expense in the quarter ended
September 30, 1997, the Bank's net margin declined to 72.6% from 74.3% for 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 (the "Loan Loss
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 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 nine months of 1997, the Bank was able to dispose of
certain non-performing loans. As a result, additions that needed to be made to
the Loan Loss Reserve, through the provision for loan and lease losses, in the
nine month and three month periods ended September 30, 1997 totaled $381,000 and
$50,000, respectively, as compared to $1,747,000 and $722,000, in the respective
corresponding nine and three month periods of 1996. Net loan charge-offs for the
nine months ended September 30, 1997, aggregated $1,183,000, representing
forty-one hundredths of one percent (0.41%) of average loans and leases, as
compared to net loan charge-offs for the same period in 1996 of $1,155,000,
which represented forty-two hundredths of one percent (0.42%) of average loans
and leases outstanding.
11
<PAGE> 12
OTHER INCOME.
Other income increased by $303,000 or 7.8% and by $44,000 or 3.2% in
the nine and three month periods ended September 30, 1997, respectively,
compared to the same periods in 1996. The increases were primarily attributable
to increases in transaction fees and service charges that were the result of
increases in the volume of total deposits and other banking transactions and
gains on the sale of certain SBA loans.
OTHER EXPENSE.
Other expense (which also is 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
$650,000 or 4.0%, and $196,000 or 3.6%, higher in the nine and three month
periods ended September 30, 1997, respectively, compared to the same nine and
three month periods of 1996. Contributing to that increase in the nine months
ended September 30, 1997, were the expenses of a Bank-wide data processing
system conversion, which was completed during the second quarter of 1997.
Non-interest expense increased, as a percentage of the Bank's operating income
(net interest income plus other income), to 72.1% and 74.1%, respectively, for
the three and nine months ended September 30, 1997 from 67.6% and 71.5%,
respectively, for the same periods in 1996, due to the combined effects of the
decrease in net interest income and the increase in non-interest expense that
occurred in the third quarter of 1997.
INCOME TAXES.
Income taxes increased by approximately $77,000 or 10.3% and $253,000
or 13.7%, respectively, during the three and nine month periods ended September
30, 1997, compared to the same periods of 1996, primarily as a result of the
increases in pre-tax income.
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1997, the Company's total assets were approximately
$16,813,000, or 4.1%, higher than at December 31, 1996. Average total assets
also increased during the nine months ended September 30, 1997, by $4,501,000,
or 1.1%, as compared to the same period of 1996.
At September 30, 1997, the Company had adequate cash resources, with
approximately $41,826,000 of cash held on deposit at other financial
institutions, $53,525,000 of investment securities and $24,550,000 in Federal
funds sold.
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 Time Deposits and purchases of new
Time Deposits by customers and, thereby, reduce the volume of those deposits at
the Bank. As a result, at September 30, 1997, the volume of demand deposits and
savings deposits at the Bank was $13,566,000 higher than at December 31, 1996
and non-interest-bearing demand deposits, as a percentage of total deposits, had
increased to 31.1% from 29.3% at December 31, 1996. By contrast the volume of
Time Deposits, including TCD's in excess of $100,000, outstanding at September
30, 1997, was $10,232,000, or 8.6%, lower than at December 31, 1996.
12
<PAGE> 13
CAPITAL RESOURCES.
During 1995, the Company's 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. During 1995 the Bank
opened two new full service banking offices; and in 1996 the Bank opened another
full service banking office, bringing the total number of its banking offices to
11 and expanding its service areas in to new communities adjacent to its
existing service areas. Since the cessation of cash dividends, the Company's
Board of Directors has declared ten (10%) percent stock dividends in each of
1995, 1996 and 1997.
As a result of the increased earnings in the first nine months of 1997
and the retention of internally generated funds, the Company's total
shareholders' equity increased by approximately $4,495,000 or 12.4% to
$40,717,000 at September 30, 1997 from $36,222,000 at December 31, 1996. During
that same period, total assets remained substantially unchanged. As a result,
the Bank's Tier 1 leverage ratio increased to 9.2% at September 30, 1997
compared to 8.5% at December 31, 1996, and as of those same respective dates,
the Bank's risk-based capital ratios were 14.0% 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 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.
Until such securities are sold or otherwise disposed of, unrealized gains are
required to be credited to, and unrealized losses are required to be charged
against, stockholders' equity, rather than being reflected as income or loss for
income statement purposes. At September 30, 1997, the Company recorded a
valuation reserve for unrealized losses on such securities aggregating
approximately $320,000. Substantially all of this amount 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
---------
Exhibit 27. Financial Data Schedule
(B) Reports on Form 8-K:
--------------------
None.
13
<PAGE> 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.
Date: November 10, 1997 FOOTHILL INDEPENDENT BANCORP
By: /s/Carol Ann Graf
--------------------------------------
CAROL ANN GRAF,
Senior Vice President, Chief Financial
Officer and Assistant Secretary
S-1
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered Page
- ------- -------------
<C> <S> <C>
Exhibit 27. Financial Data Schedule 17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 35,891
<INT-BEARING-DEPOSITS> 5,935
<FED-FUNDS-SOLD> 24,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,826
<INVESTMENTS-CARRYING> 19,699
<INVESTMENTS-MARKET> 19,506
<LOANS> 289,017
<ALLOWANCE> (3,942)
<TOTAL-ASSETS> 427,318
<DEPOSITS> 383,019
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,582
<LONG-TERM> 135
0
0
<COMMON> 22,432
<OTHER-SE> 18,605
<TOTAL-LIABILITIES-AND-EQUITY> 427,318
<INTEREST-LOAN> 22,445
<INTEREST-INVEST> 2,316
<INTEREST-OTHER> 1,255
<INTEREST-TOTAL> 26,016
<INTEREST-DEPOSIT> 7,357
<INTEREST-EXPENSE> 7,269
<INTEREST-INCOME-NET> 18,747
<LOAN-LOSSES> 381
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,006
<INCOME-PRETAX> 5,569
<INCOME-PRE-EXTRAORDINARY> 5,569
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,469
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
